The UK government’s long-term borrowing costs have hit their highest level since 1998, amid rising fuel prices and concerns about political stability.
The yield – effectively the interest rate – on 30-year UK government bonds (gilts) hit 5.76% at lunchtime on Tuesday, up 0.11 percentage points – exceeding the 27-year high reached last autumn.
Yields have been rising across leading economies amid renewed fears over rising inflation, after US efforts to escort ships through the strait of Hormuz prompted Iranian reprisals.
But the UK has been hit particularly hard by higher borrowing costs since the onset of the conflict – with some investors blaming uncertainty about the outlook for Keir Starmer’s government.
Higher government borrowing costs will eat away at the headroom the chancellor, Rachel Reeves, has built up against her fiscal rules, in the Office for Budget Responsibility’s forecasts for tax and spend.
City analysts have produced a flurry of research notes in recent days about whether Thursday’s local elections in England and Scottish and Welsh elections could augur the end for Starmer’s leadership – and what potential successors might mean for tax and spending policy.
Luke Hickmore, the investment director for bonds at Aberdeen Investments, said markets are “actively pricing” what the outcome of the elections might mean. “Politics is not background noise. In today’s gilt market, it is a fundamental part of the investment signal,” he said.
UK bond yields moved more than those of other leading economies on Tuesday, although London markets were closed for a bank holiday on Monday, so had not had time to absorb developments in the Middle East.
Ten-year UK government bond yields also rose, by 12 basis points or 0.12 of a percentage point, to 5.09% – the highest level since late March.
The Bank of England warned of higher than expected inflation last week, as it left interest rates on hold at 3.75%, but warned that it might need to take action to bring price rises under control in the coming months.
Petrol costs have already risen sharply since the start of the war, and higher energy and fertiliser prices are expected to spread to the wider economy in the coming months.