UK borrowing costs have surged to their highest level since the financial crisis, with 10-year gilt yields rising by as much as 15 basis points on Tuesday.
The benchmark 10-year gilt yield reached an 18-year high of approximately 5.2 per cent, while longer-term gilt yields climbed to 5.9 per cent during early trading.
The UK suffered a larger jump in borrowing costs than the US, Japan, and Germany, reflecting heightened inflation fears tied to trade disruption across the Middle East.
Kathleen Brooks, research director at XTB, attributed the global bond market rout to rising oil prices, with Brent crude hitting $91 per barrel.
Tensions between the US and Iran escalated sharply over the weekend following a new exchange of missile strikes, further rattling financial markets worldwide.
Brooks noted that some market analysts believed the resumption of hostilities in the Middle East would be “short lived,” though risks of prolonged trade disruption remained significant.
“We are now just two months away from the US mid-term elections, and President Trump shows no sign of scaling back the war in Iran to win votes, even though the conflict is not popular at home,” Brooks said.
“This could trigger volatility in the coming weeks, as investors fret that elevated oil prices could be here to stay,” she added.
Panmure Liberum economist Simon French warned that the rise in 20-year gilt yields could hit John Healey’s fiscal headroom by as much as £6bn.
That headroom, governed by fiscal rules requiring day-to-day government spending to match tax receipts by 2030, stood at approximately £22.7bn before the Iran war began.
Any upward revision to debt interest payments in the Office for Budget Responsibility’s forecasts would add to existing projections showing the UK government paying lenders up to £137bn in 2030.
Economists have suggested the Bank of England could respond to rising yields by slowing its quantitative tightening programme, which currently targets £70bn in bond sales this year.
Oxford Economics adviser Michael Saunders said the Bank could ease QT to £50bn annually to “limit upward pressure on gilt yields” and reduce interest rate risks on its balance sheet.
Politicians from both Chancellor of the Duchy of Lancaster Louise Haigh and Reform UK’s Richard Tice have previously criticised the Bank’s bond sell-off programme for costing taxpayers billions.
City analysts warned that persistently higher gilt yields would dampen the housing market in the near term, with commercial property values also expected to face pressure.
RSM UK economist Thomas Pugh said a drop in mortgage approvals over July could mark the beginning of a difficult second half of the year for the housing market.
Pugh said a “combination of higher borrowing costs and lower disposable income is a toxic mixture for the housing market,” underlining the broad economic risks posed by sustained yield increases.