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 PM Keir Starmer’s future. On Tuesday, the interest rate on 30-year government bonds rose to 5.77%, surpassing last September’s 27-year high. This increase poses a risk of further elevating the government’s borrowing expenses, particularly as the economy grapples with the repercussions of the Middle East conflict.
Additionally, the UK’s FTSE 100 index experienced a decline of nearly 130 points, equivalent to 1.27%, settling at 10,232.71 around 1 pm. Concurrently, the yield on 10-year gilts, considered reflective of new public debt costs, climbed above 5% to reach 5.095%, on course for its highest closure since 2008.
The trend of rising yields extends beyond the UK, with both US and German bond rates increasing due to ongoing disruptions in the Strait of Hormuz. The upcoming local elections on Thursday have introduced a layer of uncertainty, especially concerning the potential implications for the Labour party. Investors are closely monitoring the performance of Labour this week, with concerns over a possible challenge to Sir Keir’s leadership in case of poor results.
Thomas Pugh, RSM UK’s chief economist, cautioned against the consequences of a leadership change, emphasizing the potential for escalated government borrowing costs. The prevailing political focus on the Iran war is expected to shift back to domestic politics post-elections, adding to existing economic uncertainties for businesses and households, possibly leading to deferred investments and spending.
Moreover, the national debt stands at approximately £2.9 trillion, nearly equivalent to the UK’s annual gross domestic product (GDP). Elevated gilt yields contribute to increased costs in servicing the public sector’s borrowing, a burden estimated at £111 billion in the previous financial year by the Office for Budget Responsibility.
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