New nightmare for Rachel Reeves as one cost for UK hits 28-year high | Politics | News
Rachel Reeves is facing fresh pressure after Britain’s long-term borrowing costs hit a 28-year high amid war in Iran and political uncertainty. Long-term borrowing costs in the UK have risen to their highest level since 1998; The yield on 30-year government bonds peaked at around 5.78% on Tuesday afternoon, while the 10-year bond yield reached 5.1%, an 18-year high.
The rise comes as global bond markets have fallen sharply since the outbreak of the US-Israel conflict with Iran, increasing the effective cost of borrowing for governments in major economies. At the center of the disruption is the virtual closure of the Strait of Hormuz, which has hit global oil and liquefied natural gas supplies and caused energy prices to soar. This shock fed directly into expectations of higher inflation, leading investors to demand higher returns on government debt.
According to the BBC, markets responded by pricing in both higher inflation and higher borrowing costs, triggering what analysts describe as global ups and downs in bond markets. Yields rose further against government debt over the weekend, reflecting expectations that the deterioration in the Gulf could last longer than initially anticipated.
However, UK gilts underperformed compared to other G7 countries. Investors point to a domestic economy more prone to inflation and the possibility of greater political instability around recent elections as key factors weighing on UK assets.
Attention is now focused on Thursday’s election, with Labor expected to lose hundreds of council seats and face tough competition in Scotland and Wales. Widespread speculation over possible leadership challenges over the weekend also ratcheted up investors’ nerves.
Rising yields are increasing the government’s debt interest costs and shrinking the Treasury’s fiscal space, putting pressure on Ms Reeves, who is trying to meet her fiscal rules, including ensuring that debt is reduced as parliament’s share of national income.
While UK borrowing fell to a three-year low of £132bn by March, analysts warn borrowing could worsen again if inflation picks up due to persistent energy price shocks.
The Bank of England tried to calm concerns. Governor Andrew Bailey said: “If you look at it day by day… what’s driving the market, in that respect, it’s all about the conflict… also because of what’s being said about the conflict.”
He added: “ [sterling] “The exchange rate is not moving much… It is actually trading around the upper end of the band where it has been since Brexit.”
Despite this, markets remain highly sensitive to developments in the Gulf and UK election cycle; This results in high borrowing costs and high volatility in government debt markets.
