Key facts
- UK 10-year gilt yields reached an 18-year high of approximately 5.2% amid a global bond selloff.
- The surge in borrowing costs is linked to higher oil prices due to escalating US-Iran tensions.
- This increase could add up to £6bn to the UK's debt interest payments, impacting government headroom.
- The Bank of England may consider slowing its quantitative tightening program to mitigate rising gilt yields.
- Higher borrowing costs are anticipated to negatively affect the UK housing and commercial property markets.
UK borrowing costs have surged to their highest level in 18 years, driven by a widespread selloff in global bond markets. The 10-year gilt yield, a key benchmark for government borrowing, climbed as much as 15 basis points to approximately 5.2% in early trading on Tuesday, while longer-term yields reached 5.9%. This increase in UK borrowing costs was more pronounced than in the US, Japan, and Germany.
The global bond rout is attributed to heightened inflation fears, stemming from rising oil prices and escalating tensions between the US and Iran. Brent crude oil surpassed $91 per barrel following renewed missile exchanges over the weekend. Market analysts are divided on the duration of these tensions, with some anticipating a short-lived conflict while others warn of continued trade disruption and volatility.
Economist Simon French noted that the rise in 20-year gilt yields could reduce John Healey's fiscal headroom by as much as £6bn. This comes as the UK government aims to match day-to-day spending with tax receipts by 2030, with existing forecasts projecting debt interest payments of up to £137bn by that year. To mitigate upward pressure on gilt yields, some suggest the Bank of England might slow its quantitative tightening (QT) program, potentially reducing its bond-holding sales from £70bn to £50bn this year.
Despite the Bank of England's stance that QT has had a minimal impact on market pricing, some politicians have criticized the sell-off for incurring significant costs for taxpayers. Analysts remain split on the likelihood of an interest rate hike by the Bank of England's Monetary Policy Committee later this year, with many awaiting further developments in US-Iran relations. Furthermore, higher gilt yields are expected to negatively impact the housing and commercial property markets, with a potential drop in mortgage approvals signaling a challenging second half of the year.