UK gilt yields climb above 5% as oil shock deepens fiscal pressure

Traders Union
All News
Financial News
UK gilt yields above 5%

Highlights

UK 10-year gilt yields jump 0.07 percentage points to 5.04% on Tuesday after US strikes against Iran and heightened tensions in Hormuz.
Market shift raises UK borrowing costs to G7-highest as oil-driven inflation reduces fiscal headroom, with annual debt interest costs above 100 billion pounds.
Investors foresee further fiscal risk as Burnham prepares to become prime minister on July 20, amid uncertainty over chancellor succession and energy policy.

Bond sell-off intensifies before leadership change

As reported by Financial Times, 10-year gilt yields rise 0.07 percentage points to 5.04% on Tuesday after the U.S. launches fresh strikes against Iran and Tehran targets tankers in the Strait of Hormuz. The jump returns UK borrowing costs to levels not seen since May and brings them closer to the 5.2% reached then, the highest level since 2008.

The renewed sell-off in gilts comes as global bond markets react to the latest escalation in the conflict and to higher oil and gas prices. Other European sovereign yields also move up on Tuesday, with French 10-year yields rising 0.03 percentage points and Italian yields gaining 0.05 percentage points.

Two-year gilt yields, which are more sensitive to interest-rate expectations, also rise sharply, up 0.06 percentage points to 4.43% after a 0.13 percentage point move on Monday. Traders now fully price in one quarter-point UK rate rise by September this year, compared with expectations last week that such a move would not come until the first half of next year.

Fiscal and political risks unsettle investors

The market move increases pressure on Burnham, who is set to take over from Sir Keir Starmer as prime minister on July 20. He inherits a bond market that analysts view as especially exposed to higher energy prices because of the UK's energy mix and because inflation is already elevated.

Matthew Amis, investment director at Aberdeen Investments, says every further rise in oil and gas prices is a headache for Burnham because higher gilt yields mean less fiscal headroom, higher funding costs and greater pressure to shield consumers from energy costs. The conflict with Iran has already pushed UK yields up more than those of European peers, adding strain to an economy that already carries the highest borrowing costs in the G7 and debt interest costs above 100 billion pounds a year.

Investors are also weighing the risk that a shift left under Burnham could bring more borrowing and worsen the fiscal squeeze. Rachel Reeves is expected to make a final pitch for a senior government role in her Mansion House speech on Tuesday evening, but markets widely expect she will not remain chancellor, while Energy Secretary Ed Miliband is seen as the frontrunner to succeed her.

Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management, says gilts are likely to remain on the back foot in global markets because risks are skewed toward further fiscal slippage. Jordan Rochester, head of fixed income strategy for Emea at Mizuho, says UK rates may bear the brunt this week amid uncertainty over Burnham's arrival and his likely choice of chancellor, while political uncertainty leaves the UK especially vulnerable to the latest energy-driven shock.

Our earlier article examined the mounting fiscal pressure facing the UK as defence needs rise and markets demand tighter control of borrowing, setting up a political test for Andy Burnham as he prepares to take over from Keir Starmer. It noted that Labour’s past difficulty balancing spending ambitions with fiscal restraint could leave Burnham exposed if investor confidence weakens, especially with public debt near 3 trillion pounds and the risk of a market-forced correction.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.