Closing summary
Time to wrap up…
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 5.77% at lunchtime on Tuesday, up 0.13 percentage points – exceeding the 27-year high reached last September.
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 spending.
In other news…
HSBC has reported a $400m “fraud-related, secondary, securitisation exposure” in the UK, related to its investment banking division.
The loss helped to pull down HSBC’s profits, which was also hit by a jump in the potential losses it could see on soured loans to $1.3bn.
UK car sales have jumped, but the country is still on track to miss its targets for electric car take-up.
Rachel Reeves had a barney with her US counterpart, Scott Bessent, over the Iran war last month, it has emerged.
The chancellor and the US treasury secretary argued in person during the spring meetings of the International Monetary Fund, according to people briefed on the exchange, confirming a story first reported by the Financial Times.
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AJ Bell: UK borrowing costs soar ahead of local elections
The prospect of a period of political upheaval is taking its toll on UK bonds today, says AJ Bell head of financial analysis Danni Hewson.
She explains:
double quotation markThe yield on 30-year gilts has shot up, closing at the highest level since May 1998 as investors weigh up how fiscal policy might be impacted if a massive Labour drubbing in this week’s local elections results in a vote of no confidence for Keir Starmer.
“A new PM would likely mean a new chancellor, and one who might be more inclined to turn on the spending taps at a time when the country is faced with stagnant growth and another cost of living crisis.
“Although this risk premium is a symptom of nerves about rising inflation as the situation in the Middle East remains highly uncertain, it is being felt more acutely in the UK as the country has proven more susceptible to energy price shocks.
“Far from just being numbers on a spreadsheet, it makes doing stuff more expensive for the government and increases the interest paid on the huge debt pile run up during recent economic struggles. This limits what could be done by any keen new broom sweeping through Downing Street, especially if the current crisis delivers on the worst-case scenario set out by the Bank of England last week
ShareClosing summary
Time to wrap up…
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 5.77% at lunchtime on Tuesday, up 0.13 percentage points – exceeding the 27-year high reached last September.
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 spending.
In other news…
HSBC has reported a $400m “fraud-related, secondary, securitisation exposure” in the UK, related to its investment banking division.
The loss helped to pull down HSBC’s profits, which was also hit by a jump in the potential losses it could see on soured loans to $1.3bn.
UK car sales have jumped, but the country is still on track to miss its targets for electric car take-up.
Rachel Reeves had a barney with her US counterpart, Scott Bessent, over the Iran war last month, it has emerged.
The chancellor and the US treasury secretary argued in person during the spring meetings of the International Monetary Fund, according to people briefed on the exchange, confirming a story first reported by the Financial Times.
UK long-term borrowing costs have ended the day at what looks to be a 28-year closing high.
After hitting their highest level since 1998 today, UK 30-year bond yields have closed at 5.74% tonight.
The UK stock market has closed in the red, with the FTSE 100 index ending the day down 145 points or 1.4% at 10,219 points.
That’s its lowest close in almost a week, after hitting an intraday one-month low this afternoon.
Gambling group Entain (-6.4%) finished as the top faller, followed by HSBC (-5.8%) and Marks & Spencer (-4.75%).
Concern that the Middle East conflict is continuing without a resolution has pushed UK borrowing costs higher today, says Pooja Kumra, rates strategist at TD Securities.
Kumra explains (via the Financial Times):
double quotation mark“There is just no sign of this war ending anytime soon.
Gilts certainly get hit not just on inflation worries, but also brewing political risks ahead of local elections.”
Britain’s stock market has hit its lowest level in over a month.
The FTSE 100 share index is now down 167 points at 10,196 points, a drop of 1.6%, and its lowest level since 1 April.
HSBC continues to lead the fallers, now down 6.7%, after reporting a drop in profits this morning.
The US jobs market appears to have shrugged off the early economic turmoil caused by the Iran war.
The number of job openings at US companies dipped slightly in March, to 6.866m, new data shows, down from 6.922m in February.
The latest JOLTS report also shows that the job openings rate dipped, from 4.2% to 4.1%.
The number of job openings decreased in professional and business services (-318,000) but increased in finance and insurance (+98,000), the US Bureau of Labor Statistics reported.
Stocks have opened a little higher on Wall Street, as investors noted that oil prices have dipped back today.
The Dow Jones Industrial Average gained 95.2 points, or 0.19%, at the open to 49,037.12.
The S&P 500 rose by almost 0.5%, while the tech-focused Nasdaq gained 0.76%.
ShareFranco Manca restructuring wins creditors’ approval
Sarah Butler
Pizza chain Franco Manca has won approval from creditors for a restructure under which 16 of its 70 restaurants will close with the likely loss of about 225 jobs.
The sites to go include an outlet in Brixton, the south London suburb which the chain refers to as its “spiritual home” where it first opened as a market stall. Others to go include Bishops Stortford, Cheltenham, Didsbury in Manchester, Glasgow, Hove, Lincoln, Plymouth and London outlets including New Oxford Street, Tottenham Court Road, Bromley, Broadway Market in Hackney, Stoke Newington and Kilburn.
The restructure comes after the company said “external cost pressures” including increases in the legal minimum wage, business rates and employers’ national insurance contributions, meant a number of its restaurants were “no longer sustainable.”
The casual dining chain, is part of Fulham Shore, which also owns The Real Greek chain, and is owned by Toridoll, the Japanese operator of Wok to Walk and Marugame Udon, and restaurant sector investment fund Capdesia. The Real Greek is closing all but 19 of its 28 outlets after being bought out of pre-pack administration by Karali Group, the owner of the Côte restaurant chain, according to the Propel industry newsletter.
ShareFirst ever Pret a Manger drive-thru opens near WarringtonSarah Butler
Pret a Manger opened its first ever drive-thru on Tuesday in its latest bid to find fresh locations to trade.
The outlet in Warrington’s Oakwood Gate service station on the M6 near Warrington, will operate in partnership with service station specialist Motor Fuel Group, which already operates 35 of Pret’s 500 UK outlets. It will have seating for 48 people and EV charging points as well as a drive-thru service.
Ross Warnes, the president of Pret A Manger’s UK & Irish business, said:
double quotation mark“Travel hubs and roadside locations present a huge growth opportunity for Pret, making the launch of our first drive-thru a natural next step in our expansion. It’s all part of our strategy of meeting customers where they are.”
UK 30-year bond yields continued to rise after hitting their 28-year high his lunchtime, trading as high as 5.778%.
But they’ve now slipped back a little, to 5.75%.
That follows a drop in the oil price today, after Monday’s 5.8% jump, with Brent crude now down 2.6% at $111.40 a barrel.
[Reminder: The UK bond market is catching up with yesterday’s moves, after the bank holiday break yesterday].
Political uncertainty, rising energy prices and fiscal tensions are all pushing up UK borrowing costs, explains Lale Akoner, global market analyst at eToro:
double quotation mark“Gilt yields are rising because markets are starting to price in a more fragile UK outlook than headline data suggests. The combination of political uncertainty, energy sensitivity and fiscal pressure is forcing investors to reassess how much risk they are willing to carry and that adjustment is happening quickly ahead of local elections.
“Investors are responding by demanding a higher premium to hold UK debt, particularly at the long end, where sensitivity to political and economic risks is greatest. At the same time, demand dynamics have become less stable, amplifying moves in yields.
“If uncertainty persists, upward pressure on yields is likely to remain, with broader implications for borrowing costs and financial conditions across the economy.”
ShareShorter-dated UK bond yields up too
UK borrowing costs are rising across the board today, for short-dated as well as longer-dated bonds.
Two-year gilt yields are up 11 basis points (0.11 of a percentage point) to 4.533%, while give-year gilt yields are up 12bps to 4.6%.
These moves also reflect expectations that the Bank of England will raise rates two or three times to counter the threat of inflation created by the Iran war.
The money markets are currently fully pricing in two interest rate rises this year, with a third expected by February 2027.
ShareWhat would a Labour leadership challenge mean for bond markets?
Richard Partington
Who calls the shots on the bin collections in Sunderland, potholes in Hackney, or schools in Cardiff is not normally of interest to City traders in the multitrillion-pound sovereign bond market.
But for those dealing in UK government debt, Thursday’s local and devolved government elections are significantly more important than usual, amid speculation that a dire showing for Keir Starmer’s Labour party could topple him as prime minister.
“Usually local elections should not be a market relevant event, but this has indeed become one,” said Sanjay Raja, the chief UK economist at Deutsche Bank.
double quotation mark“Mainly as the repercussions, not just from a leadership challenge, but also any changes to fiscal policy and any pressure on fiscal rules the chancellor had signed up to. That is what the market is really signed up to.”
Here’s the full story:
ShareRSM UK: Why local elections could reignite political risks for economy
A change in UK prime minister – or just the prospect of a new PM – could add to the risks facing the UK economy, a key factor why borrowing costs are rising ahead of Thursday’s local elections.
Thomas Pugh, chief economist at audit, tax and consulting firm RSM UK, explains why the markets could react badly if Labour have a bad election (as appears likely):
double quotation markFirstly, in the near-term, speculation over when Sir Keir Starmer will be replaced would be enough to raise uncertainty and dampen activity by itself. Second, a messy leadership contest that opens Pandora’s box of potential tax hikes would raise uncertainty even further, potentially prompting firms to cut back on investment, and households to ramp up savings. Indeed, speculation at the last two budgets about tax increases dampened growth in the second half of both the last two years. In H1 2024 and H1 2025, growth averaged 0.7% and 0.4% respectively, before slowing sharply to 0.3% and 0.1% in H2.
“Secondly, whoever replaces Sir Keir is likely to want to spend more. The front runners are currently Angela Rayner and Andy Burnham, both of whom have indicated that they would favour a more interventionist approach to the economy, and would like to see government spending rise further. This has raised red flags among gilt investors and is one reason gilt yields – the cost of government borrowing – have risen above 5% for the first time since 2008.
Even if Starmer stays on as PM, Pugh adds, the government will face greater pressure to support households and businesses with energy bills – that would add to spending levels, pushing up bond yields.
Updated at 07.48 EDT
The yield on 10-year UK government bonds – seen as the benchmark for borrowing costs – is rising too.
10-year bond yields are up 12 basis points (0.12 of a percentage point) at 5.09%, its highest level since late March (when they were the highest since July 2023).
That reflects concerns that the Iran war could push up UK inflation, putting pressure on the British economy.
The best-case outcome from this week’s local elections for UK assets would be a relatively contained Labour defeat, which allows PM Starmer to stumble on for a short while longer.
So argues Michael Brown of brokerage Pepperstone, who wrote this morning:
double quotation markThough such a scenario may lead to a relief rally in the GBP [the pound] and in Gilts, any such move is likely to prove relatively short-lived, considering that the present political inertia will likely continue. In fact, for markets, under this scenario, the question would likely rather quickly become one of when sticking with Starmer, and a Government that is struggling to govern, is a worse outcome than changing leader?
That said, markets in the here and now are likely to react adversely to the prospect of a Labour leadership challenge, and the ousting of PM Starmer, for a couple of reasons.
Firstly, as we all know, markets hate any sort of uncertainty, especially in the political realm, and particularly with the UK having endured more than its fair share of Westminster upheaval in recent years, having already had six different Prime Ministers in the last decade. Clearly, an uncertain political backdrop not only makes it considerably harder for market participants to accurately discount the future policy path, but is also likely to lead to corporates delaying hiring and investment decisions, in turn posing a headwind to economic growth at large.
Secondly, while a leadership challenge would be a drawn out and uncertain process, it’s overwhelmingly likely that such a challenge would ultimately result in whoever the new leader is replacing Chancellor Reeves with their own choice. Although market participants have, generally, taken something of a dim view of Reeves’s endless ‘tax and spend’ policies, the prevailing opinion remains that Reeves is the ‘least bad’ option among Labour MPs, accounting for her adherence to strict fiscal rules. Any replacement for Reeves is not only likely to tear up those rules, but also to embark on a much looser fiscal stance, considerably increasing government spending, public borrowing, and running an even-larger budget deficit. Any tax hikes announced to fund those measures would at this stage be counter-productive, with the tax burden already on its way to a record high.
Combined, then, UK assets would have to deal with a rather grim combination of near-term political uncertainty, coupled with relative certainty of a further fiscal deterioration over the medium-term. This, quite clearly, poses substantial downside risks to the GBP, as well as to long-end Gilts, which are already on very fragile ground indeed.