The government’s costs for borrowing over the long term have surged to their highest point since 1998, influenced by the aftermath of the Iran conflict and speculation surrounding the future of PM Keir Starmer. On Tuesday, the yield on 30-year government bonds reached 5.77%, surpassing the peak seen in September last year, potentially increasing the government’s borrowing expenses as the economy grapples with the repercussions of the Middle East turmoil.
Simultaneously, the UK’s FTSE 100 index experienced a decline of nearly 130 points, equivalent to 1.27%, settling at 10,232.71 by 1 pm. Additionally, the yield on 10-year gilts, viewed as indicative of new public debt costs, climbed past the 5% mark to 5.095%, on course for its highest closure since 2008.
This trend is not unique to the UK, as both US and German bond yields have also risen due to ongoing disruptions in the Strait of Hormuz. The uncertainty surrounding the local elections scheduled for Thursday and its potential implications for the Labour party have triggered concerns among investors, particularly regarding a possible challenge to Sir Keir’s leadership if the party underperforms this week.
Thomas Pugh, the chief economist at RSM UK, cautioned that a change in leadership could further elevate government borrowing expenses. He emphasized that with the recent focus on the Iran conflict, the resurgence of political risk could escalate if the upcoming local elections yield unfavorable results for the government.
The mounting uncertainty, including the prospect of a leadership challenge, poses additional risks for businesses and households, potentially delaying investment and spending. Moreover, financial markets may react by pushing up gilt yields, anticipating a more lavish spending approach from any potential successor to Starmer and Reeves, thereby elevating borrowing costs across various sectors.
The accumulation of the national debt, currently standing at around £2.9 trillion, presents a significant financial burden for the government. This figure closely aligns with the country’s annual gross domestic product (GDP), reflecting the extensive scale of the debt relative to the economy’s output.
The escalation in gilt yields amplifies the expenses associated with servicing the public sector’s borrowing, a cost estimated at £111 billion by the Office for Budget Responsibility in the previous financial year.