Friday 06 March 2026 3:52 pm
| Updated:
Friday 06 March 2026 5:13 pm
(Photo by Christopher Furlong/Getty Images)
The government’s borrowing costs rose dramatically on Friday and were on track to have their worst week since Liz Truss’s fateful mini-Budget, amid fears the escalating war in the Middle East will unleash another bout of high inflation.
The interest rate on UK bonds – known as gilts – rose across the board, to reach the highest they have been since September, as traders aggressively wrote off the chance of any interest rate cuts happening for the rest of 2026.
The yield on the 10-year gilt, which is the benchmark for a country’s long-term capacity to borrow, climbed as high as 4.62 per cent, putting it on track for an over 50 basis point rise over the week as markets digested the escalating regional war in the Middle East.
Two-year bond yields that track the interest rate path more closely, also rose by some 16 basis points – or 0.16 percentage points – as the cost of government borrowing rose across the curve.
The price of government bonds – which move inversely to their yield – had been falling consistently since the start of February, after a series of soft inflation and economic data releases led traders to bet that the Bank of England would have to cut rates faster than had previously been expected.
War in Iran sparks fresh inflation fears
But America’s strike on Iran on Saturday, and Iran’s aggressive response, have rekindled inflation fears, with some traders now pricing in an interest rate hike from the Bank’s Monetary Policy Committee when it meets later this month.
“The rapid repricing of monetary policy expectations, and the UK’s history of high energy prices means that UK gilts are particularly vulnerable to this energy price spike,” said Kathleen Brooks, research director at XTB. “The selloff in gilts has been worse than the selloff in UK stocks this week. The risk is that equity traders align with bond traders, which could spell trouble for stocks if this conflict continues.
Price rise fears were largely driven by the growing consensus that constrained oil and gas supplies will trigger an energy price shock similar to the one Europe suffered at the onset of Russia’s invasion with Ukraine.
In the past five days, the price of brent crude oil – the international benchmark – has risen by some 26 per cent since , while natural gas is up over 60 per cent after a key Qatar processing plant shuttered operations.
Energy prices tend to have an outsized effect on the overall inflation picture – and thus the government’s borrowing costs – because as well as causing higher household bills, they also bleed through into the input costs of businesses, some of which is passed onto consumers.
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Borrowing costs spike as Middle East conflict rages
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