UK government borrowing costs surged to their highest level in nearly three decades this week as a bond market rout, driven by soaring oil and gas prices, deepened fears over inflation. Yields on 30-year UK bonds, known as gilts, hit 5.948 per cent on Tuesday, the highest since 1998.
Benchmark ten-year gilt yields also jumped, reaching 5.38 per cent, the highest level since 2007. Markets responded by ramping up bets on further Bank of England interest rate hikes, with as many as five now pencilled in between now and the end of 2027 and the first expected in November.
The moves threaten further misery for millions of mortgage holders, who have already seen home loan rates offered by high street banks rise sharply since the Iran war began.
At the heart of the volatility was a surge in Brent crude, which rose past $107 a barrel, its highest level since May, amid escalating hostilities in the Middle East, before easing to $105.73 on Friday morning. Oil is up from $96 at the end of last week and on course for its biggest weekly increase since July.
The rise in gilt yields adds to the headache facing Chancellor John Healey.
Gas prices and inflation
UK gas prices are surging too. Figures from the Office for National Statistics show they have climbed to their highest level since December 2022, up 128 per cent on a year ago.
Stock markets have also been rocked by the turmoil. The FTSE 100 ended 0.6 per cent, or 61.1 points, lower at 10,608.9. Share indices in Europe and the United States also turned lower.
Global bond market turmoil
The bond market carnage extended across major economies but was worst in the UK, which already suffers the highest borrowing costs in the G7.
Chaotic policy making in the United States, where Donald Trump is pledging pay-outs worth more than $1 trillion to voters if his party wins the mid-term elections, is doing nothing to help. A multi-billion dollar intervention in the bond market by Trump's Treasury secretary, Scott Bessent, has failed to stem the tide.
The US 10-year Treasury yield jumped this week to its highest level in nearly three years and is closing in on 5 per cent, a threshold considered significant by investors.
European Central Bank raises rates
On the continent, the European Central Bank hiked interest rates for the second time this year in a bid to quell growing price pressures.
"The outlook remains highly uncertain. We believe inflation will be longer lasting than we had anticipated," said ECB chief Christine Lagarde.
The US Federal Reserve will also face pressure to raise rates when its officials meet next Wednesday. Markets expect the Bank of England to leave UK rates on hold at 3.75 per cent the following day, but fears are growing that a series of increases will follow.
Squeeze on households
The surge in oil and gas prices has already squeezed motorists, with petrol prices at a new four-year high, according to the RAC.
Energy bills, already set to rise to a three-year high in October, are now forecast to climb by a further 18 per cent in January, according to experts at supplier E.ON.
The squeeze on household costs represents a major setback for Prime Minister Andy Burnham's attempt to ease the cost of living burden for millions of voters. The gilt market rout, which adds billions to the cost of servicing Britain's debt pile, will also make it harder for Labour to pay for any measures to relieve the pain.
Budget pressure for the chancellor
The turmoil adds to the headache facing Chancellor John Healey at his first Budget next month, as he attempts to fund Burnham's costly plans, including a council house building spree, an overhaul of social care, and a much-needed defence spending boost.
The rout appears to be partly self-inflicted, after the prime minister made clear in the House of Commons this week that he would never prioritise defence spending over benefits.
Neil Wilson, UK investor strategist at Saxo Bank, said the remark was "negative for gilts... since it shows zero willingness to get a grip on welfare reform."
