UK borrowing costs have surged to their highest level since the financial crisis as a bond sell-off sparked by the Middle East war deepens.
Yields on UK ten-year bonds – known as gilts – surged from 4.85 per cent to more than 5 per cent, the highest since 2008.
They have already risen sharply from 4.24 per cent at the end of February before the war started, creating a major headache for Chancellor Rachel Reeves.
It means gilts are now up by more than 16 per cent so far in March – putting them on course for the worst month since the disastrous aftermath of Liz Truss’s mini Budget in 2022.
Yields on gilts – which are small parcels of government debt – rise as their prices fall.
Bonds across the world have been selling off as a result of the Middle East crisis but the UK’s gilts are seen as particularly vulnerable.
The gilt sell-off creates a major headache for Rachel Reeves
That is because Britain already has the highest inflation among the G7 group of advanced economies – and this will rise further thanks to surging oil and gas prices caused by the war.
A warning this week from the Bank of England that it may have to put up interest rates in response to soaring inflation has also hit gilts – and left markets betting there will be three rate hikes this year.
Investors are also jittery over the prospect that the government might decide to bail out home owners as they face a steep rise in energy bills from the summer – estimated at £332. And Left-wing Labour MPs are pressuring the Chancellor to suspend Budget rules to address the crisis.
But public finances are already in a fragile state, with latest figures from the Office for National Statistics (ONS) showing borrowing hit a higher than expected £14.3 billion in February – the highest on record for February excluding the pandemic era.
The gilt sell-off will only make that worse – with experts at Pantheon Macroeconomics reckoning it will knock £7bn off the Chancellor’s fiscal ‘headroom’ to meet Budget rules.
The latest turbulence came despite oil prices ticking lower, with a barrel of Brent crude falling from $109 to as low as $105 before climbing back towards $108. It has risen from $72 before the war.
On stock markets, the FTSE 100 struggled to recover after a huge 2.4pc sell-off on Thursday.
Lale Akoner, market analyst at eToro, said a ‘sharp repricing of inflation risk’ was behind the surge in gilt yields.
‘The driver is the renewed energy shock, with oil prices surging and raising concerns about a second-round inflation wave,’ Akoner added.
‘Markets have quickly shifted from expecting rate cuts to pricing a higher-for-longer path, with additional tightening now back on the table for the Bank of England.’
