UK borrowing costs have spiralled to a new 28-year high amid bond market carnage as surging oil prices stoked deepening inflation fears.
Yields on 30-year UK bonds, known as gilts, hit 5.948 per cent, the highest since 1998, on Tuesday. And benchmark ten-year gilt yields jumped to 5.38 per cent, the highest since 2007.
Markets also ramped up their bets on Bank of England interest rate hikes, with as many as five now pencilled in between now and the end of 2027 and the first expected in November.
That threatens to create further misery for millions of mortgage holders who have already seen home loan rates offered by high street banks rise sharply since the Iran war began.
At the heart of the volatility was the surge in Brent crude, which rose past $107 a barrel to the highest level since May amid escalating hostilities in the Middle East, before easing to $105.73 on Friday morning.
Oil is up from $96 at the end of last week and on course for its biggest weeky increase since July.
The rise in gilt yields adds to the headache facing Chancellor John Healey
UK gas prices are surging too, with Office for National Statistics (ONS) figures showing they have climbed to the highest level since December 2022 – 128 per cent up on a year ago.
Stock markets have also been rocked by the chaos, with the FTSE 100 ending 0.6 per cent, or 61.1 points lower at 10,608.9. Share indices in Europe and the US also turned lower.
The bond market carnage extended across major economies but was worst in the UK – which already suffers the highest borrowing costs in the G7.
Chaotic policy making in the US, where Donald Trump is pledging pay-outs worth more than $1trn to voters if his party wins mid-term elections, is doing nothing to help.
And a multi-billion dollar intervention into the bond market by Trump’s Treasury secretary Scott Bessent has failed to stem the tide.
The US 10-year Treasury yield jumped this week to its highest level in nearly three years and is closing in on 5 per cent, considered a significant threshold.
On the continent, the European Central Bank (ECB) hiked interest rates for the second time this year in a bid to quell growing price pressures.
ECB chief Christine Lagarde said: ‘The outlook remains highly uncertain. We believe inflation will be longer lasting than we had anticipated.’
The US Federal Reserve will also face pressure to hike when its officials meet next Wednesday.
Markets expect the Bank of England to leave rates in the UK on hold at 3.75 per cent a day later but fears are growing that a series of increases will follow.
The surge in oil and gas prices has already seen motorists squeezed, with petrol prices at a new four-year high according to the RAC.
And energy bills, already set to rise to a three-year high in October, are now forecast to climb by a further 18pc in January, according to experts at supplier E.ON.
The squeeze on household costs represents a major setback for Andy Burnham’s attempt to ease the cost of living burden for millions of voters.
And the gilt market rout, adding billions to the cost of servicing Britain’s debt pile, will make it harder for Labour to pay for any measures to relieve the pain.
It all adds to the headache facing Chancellor John Healey at his first Budget next month as he attempts to fund Burnham’s costly plans including a council house building spree and an overhaul of social care, as well as a much-needed defence spending boost.
But it appears to be partly self inflicted after the PM made clear in the House of Commons this week that he would never prioritise defence over benefits.
Neil Wilson, UK investor strategist at Saxo Bank, said the remark was ‘negative for gilts… since it shows zero willingness to get a grip on welfare reform’.
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