UK long-term borrowing costs reached a 28-year high, adding pressure on public finances as markets watch the Iran war and elections.
UK long-term government borrowing costs rose on Tuesday to their highest level since 1998, adding fresh pressure to public finances at a sensitive moment for markets and Westminster.
The yield on 30-year government bonds peaked at about 5.78% on Tuesday afternoon, a 28-year high, while the 10-year yield reached about 5.1%, its highest level in 18 years, according to the BBC’s report.
The move comes amid broader turbulence in government bond markets since the US-Israeli conflict with Iran began. The war has effectively closed the Strait of Hormuz, disrupting supplies of oil and liquefied natural gas and pushing energy prices sharply higher. Markets have responded by pricing in higher inflation and borrowing costs.
The UK has been hit harder than other G7 economies, with traders pointing to Britain’s vulnerability to inflation and, in recent days, growing unease over the political outlook before Thursday’s local and national elections. Labour is expected to lose hundreds of council seats and faces difficult national contests in Scotland and Wales, while speculation about possible leadership challenges also circulated over the weekend.
Higher bond yields matter because they increase the effective cost of government borrowing. That can raise debt interest costs and narrow Chancellor Rachel Reeves’ room for manoeuvre as she tries to meet her fiscal rules, including not borrowing to fund day-to-day spending by the end of this parliament and getting debt falling as a share of national income over the same period.
The government has pointed to stronger growth, inflation and borrowing figures earlier this year, before the war in Iran. UK government borrowing fell to a three-year low in the year to March, dropping to £132bn, though analysts expect the outlook to worsen through the year if inflation rises.
The 30-year gilt is a relatively specialised part of the debt market and has historically been bought largely by defined benefit pension funds. There are no active auctions at that maturity currently scheduled by the Debt Management Office, and last year the office adjusted its debt sales remit to rely less on that type of borrowing.
The rise in 30-year yields does not directly feed through to common fixed mortgage rates in the UK in the same way as in the United States. Two- and five-year yields remain elevated, but below their 2023 peaks.
Bank of England governor Andrew Bailey played down concerns about the gilt market in a BBC interview last week, pointing to the relative strength of sterling as a sign that the UK was not moving sharply out of line with other countries. For now, markets are watching both the Gulf and the ballot box, leaving UK government debt under close scrutiny.
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