UK long-term borrowing costs hit highest since 1998 as oil surge fuels inflation fears

The UK’s long-term borrowing costs climbed to their highest level since 1998 on Tuesday, as a deepening of the Hormuz crisis added to fears the economy faces a prolonged period of higher inflation.

Thirty-year gilt yields rose 0.11 percentage points to 5.76 per cent, to reach their highest level in almost three decades. The yield on the 10-year gilt climbed 0.12 percentage points to 5.09 per cent, close to the 18-year high of 5.12 per cent hit earlier in the Iran war. Yields rise as prices fall.

Gilts have sold off during the conflict as traders bet the Bank of England will be forced to lift borrowing costs to tackle the inflationary fallout from soaring oil prices, in an economic squeeze that is piling pressure on UK Prime Minister Sir Keir Starmer ahead of regional elections this week,

Britain’s rising borrowing costs, already the highest among the G7, are an increasing strain on the public finances of a country whose debt interest costs exceed £100bn a year.

“There is just no sign of this war ending anytime soon,” said Pooja Kumra, rates strategist at TD Securities. “Gilts certainly get hit not just on inflation worries, but also brewing political risks ahead of local elections.”

Oil prices trading well above $100 a barrel in recent days as the conflict extends has fuelled a slow-moving sell-off in global long-term government bonds that has taken the US 30-year yield to 5 per cent for the first time since September.

Gilts have been the worst-performing major bond market since the conflict started, reflecting the country’s elevated inflation ahead of the war and the economy’s particular vulnerability to rising energy prices.

Traders now expect the BoE to deliver two to three quarter-point rate increases by the end of the year to combat resurgent inflation. Prior to the conflict, traders were betting the Monetary Policy Committee would lower borrowing costs to boost economic growth.

The spectre of higher inflation comes as rising political risks in the UK also unsettle investors. A heavy defeat for Sir Keir Starmer’s ruling Labour Party in local elections next week could pave the way for a shift to the left and a loosening in the government’s fiscal rules, which investors have warned against.

UK 30-year yields, which are sensitive to fears of higher inflation and concerns over the scale of government borrowing, have underperformed other countries’ long-dated bonds in recent weeks.

Greater Manchester mayor Andy Burnham — viewed as a possible challenger to Starmer in any leadership election, although he would have to win a parliamentary seat first — said on Wednesday that a rise in defence spending could be considered “exceptionally outside of the [UK’s borrowing] rules”. The Treasury has said the fiscal rules are “non-negotiable”.