The British government’s borrowing costs have risen to their highest level since the global financial crisis as investors react to rising energy prices, inflation fears and increasing budget pressures related to the escalating conflict in the Middle East.
The yield on the U.K.’s benchmark 10-year government bonds, known as gilts, briefly rose above 5 percent on Friday, crossing that threshold for the first time in 18 years. The sharp rise reflects a significant sell-off in government bonds, with prices falling as investors demand higher yields to offset perceived risks.
The move caps a turbulent week in global markets, with Britain seen as particularly vulnerable to the latest energy shock due to its reliance on imported gas and recent track record on inflation.
At the same time, the pound weakened, falling to around $1.33, while the FTSE 100 fell 1.44 percent to close at its lowest level of the year. Since hostilities began in the Gulf, the index has lost almost 1,000 points, or about 9 percent, illustrating the extent of investor uncertainty.
The increase in borrowing costs is due in large part to the extreme volatility in energy markets. The price of Brent crude has risen to almost $110 a barrel after rising as high as $119 earlier in the week and is now more than 55 percent above pre-conflict levels.
Uncertainty over the reopening of key shipping routes, particularly the Strait of Hormuz, continues to cloud the outlook and geopolitical tensions show little sign of easing.
Higher energy costs have a direct impact on expectations of continued inflation and are causing markets to reassess the likely path of interest rates. Traders now believe the Bank of England could be forced to raise interest rates by up to a percentage point this year, a dramatic reversal from previous rate cut expectations.
The rapid rise in gilt yields has drawn comparisons to previous periods of financial crisis. The 10-year yield reached as high as 5.02 percent during trading but then closed just below that level, surpassing the peaks seen during the market turmoil following the 2022 mini-budget.
Short-term borrowing costs have also risen sharply. The two-year Treasury yield rose 0.18 percentage point in a single day and has risen more than a percentage point over the past month, reflecting a rapid reassessment of monetary policy expectations.
Market participants say the combination of rising energy prices, hawkish signals from the Bank of England and pressure on the government to support the cost of living has created a perfect storm for the bond market.
While borrowing costs have risen globally and bond yields are rising in the US and across Europe, the UK is seen as particularly vulnerable to external shocks.
Economists point to the country’s dependence on imported energy and its sensitivity to global price movements as key risk factors. Daiwa Securities’ Chris Scicluna said the current environment affects the UK at a particularly difficult moment, with inflation risks already elevated.
Aberdeen-based Matthew Amis described the situation as a “blockbuster week” for the gilt market, noting that multiple pressures were coming together at the same time to push up yields.
Volatility is not limited to the UK. The European stock markets also fell sharply: the German DAX and the French CAC each lost almost 2 percent. In the United States, the S&P 500 and Nasdaq fell on reports of possible further military escalation in the region.
Even traditional safe havens have exhibited unusual behavior. Gold prices fell about 2 percent on the day and are down nearly 10 percent for the week as higher interest rates reduce the appeal of non-yielding assets.
Despite the magnitude of the market reaction, some analysts suggest that the current shock may be less severe than the energy crisis triggered by Russia’s invasion of Ukraine in 2022. However, the path ahead remains extremely uncertain.
For the UK government, the rise in borrowing costs represents a major challenge. Higher yields increase the cost of servicing debt at a time when public finances are already under pressure and limit the scope for fiscal intervention.
The impacts are equally severe for households and businesses. Rising energy costs, higher interest rates and weaker financial markets are combining to create a more difficult economic environment, with the risk that volatility will continue if geopolitical tensions continue.
In the near term, markets will be closely monitoring both developments in the Middle East and signals from central banks as investors try to gauge whether the current rise in borrowing costs represents a temporary increase or the start of a more lasting change in the global financial landscape.
