The cost of government borrowing hit the highest level since the 2008 financial crisis on Friday while shares continued to dive, capping a brutal week for global financial markets.
A sharp fall in the price of UK sovereign bonds sent the yield on the benchmark 10-year gilt past the symbolic 5 per cent mark for the first time in 18 years.
Anxiety over Britain’s vulnerability to the energy shock sparked by the escalating conflict in the Middle East, and a worse-than-expected set of UK borrowing numbers for February, also fed through into currency markets where the pound fell by a cent to $1.333.
The FTSE 100 index of British blue-chips dropped by 145 points, or 1.44 per cent, to close the week at 9,918, the lowest level this year, taking its aggregate losses since Gulf hostilities began on February 28 to almost 1,000 points, or 9 per cent.
Energy prices gyrated in response to mixed news from the Gulf, with the spot price of Brent crude extending gains to almost $110 a barrel, having yo-yoed as high as $119 earlier this week. The global benchmark, whose price underpins much of the world economy, is more than 55 per cent higher than it was before the war began.
Hopes for a resumption of tanker transit through the vital Strait of Hormuz shipping route remained muted after President Trump described Nato allies as “cowards” and Iran signalled unwillingness to negotiate while it remains under military attack.
The gold price, normally seen as a safe haven in times of financial distress, stuttered again and was trading 2 per cent lower at about $4,570 per ounce, having fallen by almost 10 per cent in its biggest weekly loss since the 1980s. Higher interest rates erode the value of the non-yielding precious metal.
Prices have responded violently to worsening views about global inflation and interest rates. Transactions in the wholesale money markets suggest traders believe the Bank of England could be forced to raise the base rate by almost a full 1 percentage point this year, from the current 3.75 per cent.
That represents a sharp souring of sentiment when only a few weeks ago, the Bank was seen as on track to cut rates. Gilt yields, which dictate the cost of government borrowing and move inversely to the price, have risen at a pace reminiscent of Liz Truss’s 2022 mini-budget.
The 10-year gilt yield pushed as high as 5.02 per cent in the early afternoon, up 17 basis points to its highest level since July 2008 — shortly before the collapse of Lehman Brothers triggered the global financial crisis — before closing at 4.99 per cent. At the height of the Truss drama, it peaked at 4.32 per cent.
The sign from Lehman Brothers was auctioned off at Christie’s in 2010John Stillwell/PA
The yield on two-year government bonds increased by 0.18 percentage points to 4.58 per cent, a very large one-day movement. It is now up by more than 1 percentage point in the last month.
While US and German bond yields have also risen sharply, the UK is seen as particularly vulnerable because of its greater dependence on imported gas, and an inferior record on controlling inflation.
“Another blockbuster week in the gilt market,” said Matthew Amis, investment director at Aberdeen, in a note to clients, listing the surge in energy prices, hawkish language from the Bank of England and pressure on the government for new cost of living measures that would stretch the public finances.
“One of these things happening would be enough to get the gilt market nervous, but when you get all three in one day the result is 10-year gilt yields heading for … 5 per cent,” he said.
Chris Scicluna, head of research at Daiwa Securities in London, said: “There is great uncertainty about the inflation outlook. This hits the UK at a time when the UK has had a greater sensitivity to global shocks.”
Germany’s DAX was was 1.9 per cent lower and France’s CAC fell 1.7 per cent. In the US, the S&P 500 and Nasdaq fell 1.5 per cent and 2 per cent respectively, as the Pentagon was reported to be preparing to deploy ground forces into Iran.
Oxford Economics said the war was unleashing higher energy and food prices and supply chain snarl-ups, but judged the shock was smaller than the one that hit the global economy in 2022. “Financial markets are dealing with a tough yet less daunting situation than after Russia invaded Ukraine,” it said.