UK government borrowing costs hit their highest level since 2008
Skyscrapers and commercial buildings light up in the skyline of London, United Kingdom, on Tuesday, November 18, 2025. UK business leaders have called on Chancellor of the Exchequer Rachel Reeves to ease energy costs and avoid increasing the tax burden on British companies as she prepares this year’s budget.
Bloomberg | Bloomberg | Getty Images
British government borrowing costs rose to their highest level since the 2008 financial crisis on Friday as investors sought to price in the risks of rising inflation and the growing possibility of interest rate hikes later this year.
UK government bonds, known as gilts, have undergone a sharp repricing as the Iran war escalates. The benchmark 10-year gold yield has risen about 68 basis points in the 15 trading days since the conflict began, while the 2-year gold yield has risen about 97 basis points.
Bond prices and yields move in opposite directions.
UK returns on Friday 10 year government bond It rose nearly 9 basis points to 4.933%, its highest level since the 2008 financial crisis.
Meanwhile the returns 2 year gilts It rose 11 basis points to around 4.513%, the highest level in more than a year.
England 2 year gilt
Britain’s bond market is particularly vulnerable to revived inflation fears as the US-Iran war drags on, partly due to its dependence on imported energy. The war and the subsequent blockade of the Strait of Hormuz, a critical oil shipping route, led to a rise in oil and gas prices.
Even before the war began, the UK had the highest government borrowing costs among the G7 countries, with long-term borrowing rates. 20- And 30 years of gilding It is trading well above the critical 5% threshold. Yields on these bonds rose by around 9 and 7 basis points, respectively, on Friday.
Nigel Green, CEO of financial consultancy deVere Group, told CNBC markets are quickly dispelling expectations of a Bank of England interest rate cut.
On Thursday, the central bank’s Monetary Policy Committee voted “unanimously” to keep the benchmark interest rate steady and said inflation would be higher in the near term “as a result of the new shock to the economy.”
Before the war started, the BOE was expected to cut interest rates. According to LSEG data, markets are currently pricing the bank’s chances of a rate cut this year at almost 0%, with the majority of traders expecting a rate hike next month. Markets are also predominantly pricing in a key rate of at least 4.25% by the end of the year; This indicates at least two interest rate increases.
“The trigger is energy as oil and gas shocks feed directly into inflation expectations, and golds are reacting exactly as you would expect in this scenario,” deVere’s Green told CNBC via email. “This is not a disorderly sale; it is an understandable re-pricing of risk.”
This is not an irregular sale; understandable repricing of risk.
Nigel Green
CEO, deVere Group
According to Green, the movements seen in the gilt markets also had a “political layer”.
“Finance minister Rachel Reeves built her fiscal framework on stability and reliability, but higher yields quickly translate into higher borrowing costs,” he said. “This, of course, reduces the room for maneuver at a time when pressure is mounting for additional support on energy and households.”
While the bond market has largely supported Reeves’ commitment to so-called “fiscal rules” during his tenure as finance minister, speculation that he could be fired last year triggered a gold selloff.
Adding to Friday’s selling pressure, official figures showed the UK government borrowed a higher-than-expected £14.3 billion ($1.74 billion) in February.
Reeves has committed to bringing day-to-day government spending to a level where it can be financed by tax revenues rather than borrowing, and in his rules he also said public debt should fall as a share of economic output by 2029-30.
“From an investment perspective, higher yields are starting to regain value in some parts of the curve,” Green added. “However, volatility will remain high as energy markets determine the inflation outlook.”
Polar Capital UK Value Opportunities Fund Fund Manager George Godber told CNBC’s “Squawk Box Europe” on Thursday that his team had refrained from reacting to the news flow about the conflict.
“The duration of this impact is profoundly unknown… In these times, history tells you the best thing to do is to remain calm,” he said. “What we do is very little.”
