Iran War Triggers Crisis: UK Borrowing Costs at Highest in 18 Years

Jakarta, CNBC Indonesia - The cost of UK government borrowing has surged to the highest level since the 2008 financial crisis, or in the last 18 years, on Friday (20/3/2026). The yield on the benchmark 10-year bond has broken through 5% as investors quickly factor in the risks of rising inflation and an increased probability of interest rate hikes by the end of this year. UK government bonds (known as gilts) have undergone a sharp repricing amid the escalation of the war in Iran. The yield on the benchmark 10-year bond has risen by around 68 basis points over 15 trading days since the conflict began, while the 2-year bond yield has increased by about 97 bps. Bond prices and yields move in opposite directions. On Friday, the yield on the 10-year UK government bond jumped around 15 bps to 5.00%, its highest level since the 2008 financial crisis. Meanwhile, the 2-year bond yield leaped 19 basis points to around 4.602%, marking the highest level in more than a year. Pressure on the Bond Market The UK bond market is highly vulnerable to concerns over resurgent inflation as the US-Iran war drags on, partly due to the country’s reliance on energy imports. The war, and the ongoing blockade in the Strait of Hormuz - a vital oil shipping route - have triggered a spike in oil and gas prices. Even before the war broke out, the UK had the highest government borrowing costs among G7 nations, where 20- and 30-year bonds were trading well above the 5% threshold. Yields on those bonds rose by around 9 and 7 basis points on Friday, respectively. Nigel Green, CEO of financial advisory firm deVere Group, told CNBC that markets are quickly pulling back expectations of rate cuts from the Bank of England (BoE). On Thursday, the central bank’s Monetary Policy Committee stated it had voted unanimously to hold its benchmark interest rate, and noted that inflation would be higher in the short term “as a result of the new shock to the economy.” Before the war started, the BoE was expected to cut its key interest rate. Currently, markets see the probability of a rate cut from the central bank this year as close to 0%, with the majority of traders projecting a hike next month, based on LSEG data. Markets also predominantly expect the key interest rate to be at least 4.25% by year-end, indicating at least two rate hikes. “The trigger is energy, as the oil and gas price shock directly impacts inflation expectations, and bonds are reacting exactly as you would expect in this scenario,” Green from deVere told CNBC. “This is not erratic selling, but an understandable risk repricing.” Political and Fiscal Policy Factors There is a “political layer” to the movements in the bond market, according to Green. “Chancellor Rachel Reeves has built her fiscal framework on stability and credibility, but higher yields quickly translate into higher borrowing costs,” he explained. “This, of course, narrows her room for manoeuvre just as pressure to provide additional support for energy and households is mounting.” The bond market has generally supported Reeves’ commitment to what are called “fiscal rules” during her tenure as chancellor, where speculation that she might be sacked last year once triggered bond selling. Adding to the selling pressure on Friday, official figures showed the UK government borrowed £14.3 billion, a higher-than-expected amount in February. Reeves has committed to bringing daily government spending to a level funded by tax receipts rather than borrowing, with her rules also stipulating that public debt must fall as a share of the economic forecast by 2029-2030. “From an investment perspective, higher yields are starting to restore value in some parts of the curve,” Green added. “However, volatility will remain high as long as energy markets dictate inflation prospects.” George Godber, Fund Manager at Polar Capital U.K. Value Opportunities Fund, told CNBC’s “Squawk Box Europe” programme on Thursday that his team is avoiding knee-jerk reactions to news flow around the conflict. “The duration of this impact is highly unknown. In times like these, history tells you the best thing to do is stay calm,” he said. “What we’ve done is very little.”