British Government borrowing costs rocketed to levels not witnessed since the 2008 financial crisis on Friday, as mounting inflation concerns gripped investors amid the ongoing US-Iran war.
The surge in gilt yields reflects growing anxiety over energy price shocks stemming from the war and the blockade of the Strait of Hormuz, a vital shipping route for global oil supplies.
Traders have been rapidly reassessing the likelihood of interest rate increases later this year, abandoning earlier expectations that the Bank of England would ease monetary policy.
Britain’s heavy dependence on imported energy has left its bond market especially exposed to the inflationary pressures unleashed by the geopolitical crisis.
The Chancellor is under ‘pressure’ from soaring borrowing costs
|
PA / MARKETWATCH
The benchmark 10-year gilt yield climbed approximately nine basis points on Friday to reach 4.933 per cent, a peak unseen since the global financial crisis.
Shorter-dated bonds fared even worse, with two-year gilt yields rising 11 basis points to roughly 4.513 per cent, their highest point in over twelve months.
Since hostilities commenced 15 trading days ago, the 10-year yield has surged around 68 basis points whilst the 2-year equivalent has jumped approximately 97 basis points.
The UK already carried the heaviest borrowing costs among G7 nations before fighting erupted, with 20- and 30-year gilts trading above the critical 5 per cent threshold.
The 10-year gilt yield has soared to levels not seen in more than a decade
|
MARKETWATCH
The 30-year gilt yield hsa fallen slightly after reaching new heights
|
MARKETWATCH
The Bank of England’s Monetary Policy Committee voted unanimously on Thursday to maintain its benchmark interest rate, acknowledging that inflation would rise in the near term “as a result of the new shock to the economy.”
Prior to the outbreak of hostilities, markets had anticipated the central bank would reduce borrowing costs. That expectation has now been completely reversed, with LSEG data indicating a near zero probability of any rate cut this year.
The overwhelming majority of traders are instead betting on a rate increase next month, according to market pricing. By year end, markets anticipate the key rate reaching at least 4.25 per cent, implying a minimum of two hikes.
Rachel Reeves is attempting to bolster the UK economy | RACHEL REEVES / LINKEDIN
Nigel Green, chief executive of financial advisory firm deVere Group, told CNBC that markets were swiftly abandoning hopes of rate reductions from the Bank of England.
Mr Green said: “The trigger is energy, as oil and gas shocks are feeding directly into inflation expectations, and gilts are reacting exactly as you would expect in this scenario.”
“Finance minister Rachel Reeves has built her fiscal framework around stability and credibility, but higher yields quickly translate into higher borrowing costs. This, of course, narrows her room for maneuver at precisely the moment pressure is building for additional support on energy and households.”
Friday’s rises in longer-dated bonds saw 20- and 30-year gilt yields increase by around 9 and 7 basis points respectively.