The recent surge in the government’s long-term borrowing costs, reaching levels not seen since 1998, is attributed to the aftermath of the Iran war and speculation surrounding the future of PM Keir Starmer. On Tuesday, the interest rate on 30-year government bonds rose to 5.77%, surpassing the peak seen in September last year. This increase poses a risk of further escalation in the government’s borrowing expenses, coinciding with the economic vulnerabilities stemming from the Middle East conflict.
Concurrently, the FTSE 100 index of the UK’s largest listed companies experienced a downturn, dropping by nearly 130 points to 10,232.71 by 1 pm. Additionally, the yield on 10-year gilts, reflecting new public debt costs, climbed above 5% to 5.095%, heading towards its highest closure since 2008.
The global trend of rising yields extends to the US and Germany, partly due to ongoing disruptions in shipping at the Strait of Hormuz. The impending local elections on Thursday have introduced further uncertainty, particularly regarding the potential consequences for the Labour party. Concerns have emerged among investors regarding a probable challenge to Sir Keir’s leadership if the party underperforms this week.
Thomas Pugh, the chief economist at RSM UK, cautioned that a leadership change could elevate government borrowing costs. He emphasized that the recent focus on domestic politics, overshadowed by the Iran war, might shift back to the forefront due to the upcoming elections and subsequent implications for the economy.
With the national debt standing at approximately £2.9 trillion, equivalent to the UK’s annual gross domestic product (GDP), any increase in gilt yields amplifies the burden of servicing the public sector’s borrowing expenses. The Office for Budget Responsibility estimated these costs to reach £111 billion in the previous financial year, underscoring the financial challenges facing the government amidst the current economic uncertainties.
