Why are UK borrowing costs jumping more than others?

Hinzugefügt: 2026-05-17

[00:00:01]UK 10-year government bond yields have hit their highest point since 2008 in recent days. It puts Britain above its peers including Germany and the US. So, what's driving the volatility? Politics, inflation risk, and a swingier bond market. Political pressure on Prime Minister Keir Starmer is adding a risk premium. Investors see leadership uncertainty and the potential for higher borrowing if successors loosen the purse strings. One idea floated would add about 67.5 [music] billion dollars over five years if defense spending were exempt from current budget rules.

[00:00:40]The memory of a 2022 mini budget also lingers weighing on British bonds international appeal. Liz Truss's brief tenure as Prime Minister saw her move to slash taxes causing long-dated gilt prices to tumble and forcing the Bank of England to step in and halt a fire sale by pension funds. After that episode, some international buyers demanded extra compensation to hold gilts, a premium which has not fully disappeared.

[00:01:09]Inflation risk is back in focus. The US-Israeli war on Iran has closed the Strait of Hormuz pushing oil and natural gas [music] prices up about 50%. The Bank of England says UK inflation could exceed 6% [music] early next year if energy prices rise further.

[00:01:27]Markets [music] now price Bank of England rates rising from 3.75% to around 4 and 1/2% by February 2027 reversing expectations [music] for cuts.

[00:01:39]While inflation in the Eurozone had returned to target before the conflict, it's been stickier in Britain. Gilts are also more volatile than other bonds. For years, pension funds and life insurers were steady buyers of long-dated gilts to match [music] liabilities. As companies have shifted away from defined benefit pension schemes, the demand has ebbed. More trading now involves foreign hedge funds and shorter time horizons.

[00:02:05]That can amplify day-to-day [music] price swings and the yield investors demand.

[00:02:10]Higher yields raise the cost of new borrowing. Britain's budget watchdog estimates [music] that every 1% point rise in yields adds about 20.2 billion dollars a year in debt interest by 2030.

[00:02:24]The government has around 32.4 billion dollars of headroom to meet its goal of a balanced current budget by 2029 to 2030. So, the margin is tight.