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Concerns about the UK's stagnant economy and rising inflation are unnerving investors, pushing borrowing costs to their biggest premium over German debt yields since the 1990s.

The spread between the two countries' 10-year bonds has soared above 2.3 percentage points, the highest since German reunification and assuming the top two years ago after Liz Truss' poor "mini" budget. .

"Stagflation concerns have returned to the UK bond market," said Robert Dishner, senior portfolio manager at Neuberger Berman.

He added that investors were also "slightly on the bullish side" on the scale of the Labor government's borrowing plans, which could rise further if weak growth holds back tax receipts.

The moves in the gilt market come ahead of the Bank of England's final policy meeting of the year on Thursday, with investors betting that continued inflation Despite the stagnant economy, the central bank will not be able to cut its benchmark rate.

Recent data is shown GDP shrank suddenly for the second month in a row in October.

increase in gilt The yield has pushed government borrowing costs close to a one-year high since Chancellor Rachel Reeves' October budget last month, which briefly unsettled investors by ramping up the Treasury's debt issuance plans.

Ten-year gilt yields rose 0.06 percentage point to 4.58 percent on Wednesday after data showing UK inflation. Rapidly increased to 2.6 percent In November.

"High borrowing costs continue to undermine the UK's financial position," said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.

"If gilt yields rise above levels seen in the trus tantrum, Rachel Reeves could be forced to raise taxes or cut spending to address further pledge-breaking and debt sustainability concerns."

Yields have risen recently from less than 4.2 percent two weeks ago as traders bet the BoE will now make just two quarter-point cuts next year, down from the four expected in October.

The data "calls into question the Bank of England's ability to cut rates," said Craig Inches, head of rates and cash at Royal London Asset Management.

The yield gap with the eurozone is also largely due to investor expectations that the European Central Bank will lower borrowing costs more quickly than the BoE as it grapples with an even sharper slowdown in growth.

Additionally, the rise in yields reflects a sell-off in the US Treasury market, where investors have scaled back their expectations of a 2025 Federal Reserve rate cut following Donald Trump's election victory last month.

Economists have long expected UK prices to rebound under pressure by the end of the year, due to so-called base effects, as energy prices fell a year ago, the point of comparison when calculating annual inflation. .

However, BoE policymakers are also concerned about the scale of rapid wage growth alongside price increases in the services sector.

Services price growth of 5 percent in November was higher than the BoE's own forecast of 4.9 percent and well above the rate seen as being in line with the central bank's 2 percent inflation target.

Separate figures earlier this week showed average weekly UK earnings, excluding bonuses, rose a faster-than-expected 5.2 per cent in the three months to October.

Higher government spending and borrowing in Reeves' budget is also likely to add to inflationary pressures.

According to the BoE's latest set of forecasts last month, the measures will add 0.75 percentage points to GDP and about 0.5 percentage points to consumer price inflation in about a year's time.