UK Long-Term Borrowing Costs Hit 1998 Peak Amid Iran War and Election Uncertainty

Long-term UK borrowing costs have climbed to their highest levels since 1998. The increase comes as the Iran war drags on and political uncertainty builds ahead of local and national elections.

Government bond markets in major economies have dropped since the US-Israeli conflict with Iran started. That has driven up the effective borrowing costs for governments.

On Tuesday afternoon, the yield on 30-year government bonds hit a 28-year high. The 10-year bond yield reached an 18-year high.

The Iran war has effectively closed the Strait of Hormuz. The blockage has disrupted global supplies of oil and liquid natural gas, sending energy prices soaring.

Markets have responded by pricing in higher inflation and borrowing costs. Bond markets worldwide have swung wildly as a result.

Over the weekend, bond markets slid further. Traders see this as a sign of a drawn-out Hormuz blockage.

UK markets have suffered more than those in other G7 countries. Traders attribute this to the UK's proneness to inflation and recent signs of political instability tied to upcoming elections.

The government highlights improvements in growth, inflation, and borrowing earlier this year, before the Iran war began.

The 30-year UK bond yield topped out at 5.78%. The 10-year yield peaked at 5.1%.

Higher yields squeeze Chancellor Rachel Reeves' spending options as she aims to meet budget rules. Those include avoiding borrowing for day-to-day spending by the end of this parliament and reducing government debt as a share of national income over the same period.

UK government borrowing fell to a three-year low of £132 billion for the year through March. Analysts predict it will rise if inflation accelerates.

The 30-year gilt amounts to a 30-year loan to the government. Pension funds with defined benefits have historically bought most of them. The Debt Management Office currently has no auctions scheduled for this term.

At last year's Budget, the Debt Management Office adjusted its debt sales to rely less on this type of borrowing.

Unlike in the US, the 30-year gilt does not directly affect common fixed mortgage rates in the UK. Yields on two- and five-year bonds stay high but below 2023 peaks.

Bank of England Governor Andrew Bailey dismissed gilt market worries in a BBC interview last week. He cited the pound's strong value.

"If you look at day to day... what's moving the market - in this respect, it's all to do with the conflict… also because what gets said about the conflict," Bailey said.

"The [sterling] exchange rate doesn't move much at all. That's one thing I look at when I'm judging, is there a particular UK story here? Is the UK somehow different to other countries? It's trading actually around the upper end of the band it's been in since Brexit."