Lights shine on skyscrapers and commercial buildings across the skyline of the City of London, UK, on Tuesday November 18, 2025. British business chiefs urged Chancellor of the Exchequer Rachel Reeves to cut energy costs and avoid increasing the tax burden on British businesses as she prepares this year’s budget.
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The British government’s borrowing costs rose to their highest level since the 2008 financial crisis on Friday, with the benchmark 10-year Treasury rate breaching 5%, as investors struggled to price in rising inflation risks and a growing likelihood of interest rate hikes later this year.
British government bonds – so-called gilts – have been sharply revalued as the Iran war escalates. Benchmark 10-year Treasury yields have risen about 68 basis points in the 15 trading days since the conflict began, while 2-year Treasury yields have risen about 97 basis points.
Bond prices and yields move in opposite directions.
On Friday, the UK yield was increased 10-year government bonds rose around 15 basis points to 5.00%, the highest since the 2008 financial crisis.
Now it continues 2 year old gilts rose 19 basis points to around 4.602%, marking its highest level in more than a year.
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British 2 year insurance
The U.K. bond market has been particularly vulnerable to fears of renewed inflation as the war between the U.S. and Iran drags on, partly because of its reliance on imported energy. The war and the subsequent blockade of the Strait of Hormuz – a key oil shipping route – have caused oil and gas prices to rise.
Even before the outbreak of war, the United Kingdom had the highest long-term government borrowing costs of all G7 countries 20- And 30 year old gilts Trading is well above the crucial 5% threshold. Yields on these bonds rose about 9 and 7 basis points, respectively, on Friday.
Nigel Green, CEO of financial advisory firm deVere Group, told CNBC that markets were quickly scaling back their expectations of interest rate cuts by the Bank of England.
On Thursday, the central bank’s monetary policy committee said it had voted “unanimously” to keep the key interest rate unchanged and said inflation would be higher in the near term “due to the new shock to the economy.”
Before the war began, the BOE was expected to lower the key interest rate. Currently, markets are pricing in a near 0% chance of a bank rate cut this year, with the vast majority of traders expecting a rate hike next month, LSEG data shows. In addition, markets are largely pricing in a key interest rate of at least 4.25% by the end of the year, which suggests at least two rate hikes.
“The trigger is energy, as oil and gas shocks directly impact inflation expectations and Treasury bonds react exactly as one would expect in this scenario,” deVere’s Green told CNBC by email. “This is not a disorderly sell-off – it is an understandable reassessment of risk.”
This is not a disorderly sell-off, but rather an understandable reassessment of risk.
Nigel Green
CEO, deVere Group
According to Green, there was “also a political layer” to the moves in gilt markets.
“Treasury Minister Rachel Reeves has built her fiscal framework around stability and credibility, but higher yields quickly lead to higher borrowing costs,” he said. “This of course limits their scope for action at precisely the moment when the pressure for additional support for energy and households increases.”
The bond market has largely supported Reeves’ commitment to her so-called “fiscal rules” during her tenure as finance minister, with speculation that she could be ousted from office last year sparking a sell-off in British government bonds.
Official figures showed the British government borrowed more than expected to the tune of 14.3 billion pounds ($1.74 billion) in February, adding to selling pressure on Friday.
Reeves has committed to bringing daily government spending to a level where it can be financed through tax revenue rather than borrowing. Its rules also state that national debt must fall in relation to economic output by 2029/30.
“From an investment perspective, higher yields are starting to restore value in parts of the curve,” Green added. “But volatility will remain high as energy markets determine the inflation outlook.”
George Godber, fund manager of the Polar Capital UK Value Opportunities Fund, told CNBC’s “Squawk Box Europe” on Thursday that his team was avoiding any knee-jerk reaction to the deluge of news surrounding the conflict.
“The duration of these impacts is completely unknown…In these times, history shows that it is best to remain calm,” he said. “What we have done is very little.”
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