𝓤𝓷𝓲𝓽𝓮𝓭 𝓝𝓮𝔀𝓼

Rachel Reeves is facing fresh pressure after UK long-term borrowing costs hit a 28-year high amid war in Iran and political uncertainty. Long-term UK borrowing costs have surged to their highest level since 1998, with the yield on 30-year Government bonds peaking at around 5.78% on Tuesday afternoon, while the 10-year gilt reached about 5.1%, an 18-year high.

The rise comes as global bond markets have fallen sharply since the outbreak of the US-Israeli conflict with Iran, which has driven up the effective cost of borrowing for governments across major economies. At the centre of the disruption is the effective closure of the Strait of Hormuz, which has hit global supplies of oil and liquefied natural gas and caused energy prices to skyrocket. That shock has fed directly into expectations of higher inflation, prompting investors to demand higher returns on government debt.

Markets have responded by pricing in both higher inflation and higher borrowing costs, triggering what analysts describe as a global rollercoaster in bond markets, reported the BBC. Over the weekend, yields moved further against government debt, reflecting expectations that the Gulf disruption could last longer than initially assumed.

However, UK gilts have underperformed relative to other G7 nations. Traders point to a more inflation-prone domestic economy and, in recent days, prospects of more political instability around the raft of elections as key factors weighing on UK assets.

Attention is now focused on Thursday’s elections, with the Labour Party expected to lose hundreds of council seats and face difficult contests in Scotland and Wales. Over the weekend there was also widespread speculation about possible leadership challenges, adding to investor nerves.

Rising yields increase the government’s debt interest costs and tighten fiscal space for the Treasury, putting pressure on Ms Reeves as she tries to meet her fiscal rules, including ensuring debt falls as a share of national income over the parliament.

While UK borrowing fell to a three-year low of £132bn for the year to March, analysts warn that borrowing could worsen again if inflation picks up due to sustained energy price shocks.

The Bank of England has sought to calm concerns. Governor Andrew Bailey said: “If you look at day to day… what’s moving the market – in this respect, it’s all to do with the conflict… also because what gets said about the conflict.”

He added: “The [sterling] exchange rate doesn’t move much at all… It’s trading actually around the upper end of the band it’s been in since Brexit.”

Despite that, markets remain highly sensitive to developments in the Gulf and the UK’s electoral cycle, leaving borrowing costs elevated and volatility high in government debt markets.