The government\u2019s borrowing costs have risen to their joint highest level since the 2008 financial crisis, after a sharp jump in the oil price prompted a sell-off in UK debt because of concerns over inflation.<\/p>\n
The yield on the 10-year gilt<\/a> \u2013 the main benchmark for any government\u2019s long-term ability to borrow \u2013 climbed back above five per cent for only the third time since the Iran war broke out on Tuesday, laying bare the extent to which Britain is almost uniquely exposed to the ongoing energy shock.<\/p>\n The UK\u2019s government borrowing costs have risen the most of any developed economy in the past two months, with moves particularly pronounced at the shorter end of the yield curve, which closely tracks the interest rate path.<\/p>\n The yield on the two-year gilt has risen by more than a full percentage point since the start of March, as traders were forced aggressively to pare back earlier bets on the number Bank of England rate cuts they forecast this year.<\/a><\/p>\n But as the war has dragged on, the sell-off has spread to the government\u2019s longer-dated coupons, as fears the country will struggle to insulate itself from future crosscurrents will compound bond markets\u2019 reservations over the country\u2019s growth prospects and grasp on the public finances.<\/p>\n Analysts have warned that a succession of policy errors and the UK\u2019s reliance on oil and gas imports mean the British economy is particularly vulnerable to external shocks<\/a> because of the knock-on effect that higher energy imports will have on already elevated prices.<\/p>\n And the path has exaggerated the pre-existing difference<\/a> \u2013 known as the spread \u2013 between the UK\u2019s borrowing costs and those charged to the US. The spread between the 10-year gilt yield and the US Treasury\u2019s interest rate has now reached 70 basis points for only the second time since late 2025.<\/p>\n \u2018Policy mistakes\u2019 blamed for sky-high borrowing costs<\/p>\n \u201cOver the past decade, the UK economy has suffered a succession of policy mistakes and resulting rates of inflation which have consistently exceeded the prevailing trends across other major economies,\u201d Kallum Pickering, chief economist at Peel Hunt, wrote in a note. \u201cUnsurprisingly, it no longer takes much to spook UK government debt markets.\u201d<\/p>\n The Bank of England has struggled to bring price rises to heel as successfully as rival central banks ever since since Russia\u2019s full-scale invasion of Ukraine and Liz Truss\u2019s fateful mini-Budget combined to push inflation into double digits in 2022. Stubborn inflation is a major bugbear of bond investors, as price rises eat into the real returns one generates from bond over the course of its maturity.<\/p>\n Before the war, price rises had been forecast to mollify, after three years of stubbornly sticking above the Bank\u2019s two per cent target. And a succession of positive government borrowing figures \u2013 boosted by record tax receipts \u2013 had helped alleviate traders\u2019 concerns over the government\u2019s grasp on the public finances.<\/p>\n But those positive developments, which had helped bring down borrowing costs over the first three months of the year, were knocked off course by the Iran war and its effect on the oil price. On Tuesday, Brent crude was trading at over $111, its highest<\/a> price since the war began on 28 February, after ceasefire talks between the US and Iran broke down.<\/p>\n Kathleen Brooks, research director at XTB, said: \u201cYields are likely to creep higher as we lead up to the key central bank meetings this week, and as we wait to hear what happens next in the Strait of Hormuz.\u201d<\/p>\n By City AM\u00a0<\/p>\n