UK 30-year gilt yields hit 28-year high as Iran war and election jitters collide

LONDON, May 5 — Long-dated UK government borrowing costs jumped to a 28-year high on Tuesday. Investors priced in a fresh wave of inflation from the Iran war and bet that this week's local elections would deepen the political volatility around Sir Keir Starmer's premiership.

The yield on 30-year gilts rose as much as 13 basis points to 5.78 per cent in afternoon trade, its highest level since 1998. Ten-year yields topped 5.1 per cent, an 18-year high, according to data reported by Bloomberg and the BBC. The selloff swept across all maturities as London's bond market reopened from a public holiday. It was the steepest move in the G7, a pattern traders blame on Britain's exposure to imported energy and a thicker political risk premium ahead of Thursday's vote.

"Markets have long memories, and in the UK gilt market that memory is dominated by Liz Truss," Nigel Green, chief executive of DeVere Group, told City AM. "The combination of a potentially massive electoral setback, an organised push against Starmer, and questions over how firmly Reeves can hold the fiscal line creates a clear risk signal for UK bond markets."

What is moving the market

Government bond markets across the major economies have been falling, and yields rising, since US and Israeli forces struck Iranian nuclear and military targets on February 28. The effective closure of the Strait of Hormuz, through which roughly a fifth of the world's oil flowed before the war, has lifted spot energy prices and forced traders to revise inflation forecasts upward. Brent crude jumped more than 5 per cent on Tuesday after Iran fired drones and missiles at the United Arab Emirates over the weekend, pushing oil back toward multi-year highs.

UK debt has fared worse than its G7 peers, the BBC's economics editor reported. Traders point to a domestic economy more sensitive to imported inflation and fresh worries about the political backdrop. Money markets are now pricing in at least two more interest-rate increases from the Bank of England in coming months, on top of the 3.75 per cent rate the central bank held last week.

Green's reference to the 2022 mini-Budget is not idle. That September episode, in which yields spiked, long-dated gilts collapsed and the Bank of England was forced into emergency bond purchases to stabilise pension funds, has become the City's standing benchmark for what happens when fiscal credibility comes into question. The long end of the curve is where it shows up first.

Politics on the eve of the vote

Polls open on Thursday for council seats across England and for the devolved parliaments in Scotland and Wales. Labour is widely expected to lose hundreds of seats. Reform UK and the Greens are both projected to gain. The expected result has prompted weekend speculation about a leadership challenge to the prime minister.

Investors are paying close attention to who the alternative might be. The Manchester mayor Andy Burnham, the health secretary Wes Streeting and the former deputy prime minister Angela Rayner are all viewed in markets as candidates from the soft left of the party who would take a looser approach to the chancellor's fiscal rules. That prospect, City AM reported, is what has spooked long-end gilt investors most acutely.

Rising yields chip away at Rachel Reeves' fiscal headroom, the cushion she set out at her last Budget. They lift the cost of servicing existing debt and shrink the room she has to meet two self-imposed rules: not borrowing to fund day-to-day spending by the end of the parliament, and getting national debt falling as a share of GDP over the same period.

Bailey plays it down

The Bank of England governor, Andrew Bailey, was at pains last week to dismiss the idea that the gilt market is sending a uniquely British distress signal. "What's moving the market, in this respect, it's all to do with the conflict, also because of what gets said about the conflict," Bailey told the BBC. "The 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?"

Sterling was broadly flat at $1.353 on Tuesday, which supports Bailey's point that the move is being driven by global rates rather than a sterling crisis. US 10-year Treasury yields were also flat in afternoon trade after rising steadily in recent weeks, the Independent reported.

What it means for the Treasury

The 30-year gilt is something of a niche product. It has historically been bought by defined-benefit pension funds rather than retail investors, and the Debt Management Office changed its remit at last year's Budget to lean less on the very long end. No auctions at that maturity are currently scheduled. Unlike the US, UK 30-year yields do not feed directly into fixed mortgage rates; the two- and five-year yields, which do, are elevated but still below their 2023 peaks.

For the chancellor, the impact is more direct. UK government borrowing fell to a three-year low of £132bn in the year to March, before the war began. Analysts now expect that figure to worsen as inflation picks up and debt-interest costs climb, eating into a buffer Reeves had built for a much smaller shock.

Two fronts, one bond market

Traders are now watching two stories in tandem: the dispatches out of the Gulf, and the count from British ballot boxes on Thursday night. Either could move yields again on Friday morning. It is the combination that is making gilt desks edgy.