UK long-term borrowing costs hit 28-year high as Iran conflict and election uncertainty weigh

UK long-term UK borrowing costs rose to their highest level in 28 years on Tuesday, as markets reacted to the conflict in Iran and heightened political uncertainty ahead of UK elections.

The yield on 30-year UK government bonds (gilts) peaked at around 5.78%, while the 10-year yield hit an 18-year high of roughly 5.1%. Higher gilt yields translate into higher debt interest costs for the government.

What is driving the move

Bond markets in major economies have sold off since the US-Israeli conflict with Iran began, pushing up government borrowing costs globally. The conflict has led to the effective closure of the Strait of Hormuz, disrupting supplies of oil and liquid natural gas and driving energy prices higher.

Markets have responded by factoring in higher inflation and higher interest rates, which has lisourcesed yields.

Why the UK has been hit harder

Traders said the impact on UK bond markets has been more pronounced than in other G7 countries, citing the UK’s inflation-prone economy and increased political jitters in the run-up to local and national elections.

Implications for the public finances

Elevated borrowing costs could limit the Chancellor’s room for manoeuvre in sticking to budget rules, including commitments not to borrow for day-to-day spending by the end of the current parliament and to have government debt falling as a share of national income over the same period.

UK government borrowing for the year to March fell to a three-year low of £132 billion, but analysts have warned borrowing could worsen if inflation picks up.

Bank of England Governor Andrew Bailey has played down concerns specific to the UK gilt market, pointing to the pound’s stability, while also noting that market moves have been driven largely by developments in the conflict and commentary around it.