British government borrowing costs surged to their highest levels since the 2008 global financial crisis on Friday, as investors priced in rising inflation risks and a growing likelihood of further interest rate hikes.
The yield on the benchmark 10-year UK gilt rose to 4.927%, its highest since July 2008, while the two-year yield climbed 11 basis points to 4.522%, the highest level since January 2025.
Bond yields move inversely to prices, and the sharp rise reflects a broad sell-off in government debt.
The surge in borrowing costs is a setback for the UK government, reducing fiscal headroom and complicating efforts to stay within budgetary rules.
Energy shock drives inflation concerns
The sell-off has been fuelled in part by the ongoing Middle East conflict, which has disrupted energy supplies and driven up oil and gas prices.
The blockade in the Strait of Hormuz, a key global shipping route, has heightened concerns for the UK, which remains heavily reliant on imported energy.
Oxford Economics’ Edward Allenby said inflation could climb to 4% later this year as a result of higher energy costs.
He warned that rising prices would erode household spending power and weigh on economic growth.
Oxford Economics now expects UK GDP to grow by just 0.4% this year and 1% next year, significantly lower than earlier projections.
Market is betting on further rate hikes
Investors are increasingly betting that the Bank of England will need to raise interest rates multiple times this year, despite recent attempts by Governor Andrew Bailey to temper expectations.
Kathleen Brooks, research director at XTB, said the UK bond market was facing renewed pressure.
“The bond vigilantes are after the UK again,” she said, pointing to a mix of global and domestic factors.
Brooks noted that the UK’s energy pricing structure could amplify the impact of rising costs.
“The UK is looking like an outlier, and multiple factors are causing this. Events in the Middle East are a major factor, along with the unprecedented repricing of UK interest rate expectations. More than 3 rate hikes are still expected this year from the BOE, even after Andrew Bailey attempted to calm markets [yesterday],” she said.
“Our blunt energy pricing mechanism will cause bills to surge later this year, and we have a Labour government that is spending more in welfare than it is bringing in through taxation,” she said, adding that both factors were unsettling investors.
UK seen as outlier in global bond markets
Even before the latest move, the UK had some of the highest borrowing costs among G7 nations.
Yields on longer-dated 20- and 30-year gilts have remained above the 5% mark, reflecting sustained investor concerns about inflation and fiscal risks.
Lale Akoner, global market analyst at eToro, said the sell-off highlights the UK’s vulnerability to external shocks.
“The move has been most aggressive at the front end, reflecting uncertainty around policy, but longer-dated yields are also rising as investors demand greater compensation for inflation and fiscal risk,” he said.
“The UK remains particularly exposed given its sensitivity to energy prices and already stretched public finances, which adds to upward pressure on borrowing costs.”
Policy dilemma for the Bank of England
The surge in yields underscores the difficult position facing policymakers.
While inflation risks remain elevated, economic growth is weak, limiting the scope for aggressive tightening.
“The Bank of England is in a difficult position. Growth remains weak and demand soft, limiting the scope for aggressive tightening, yet persistent inflation risks reduce flexibility. This tension is driving volatility across the curve,” Akoner said.
He added that the current environment could pose broader challenges for financial markets.
“Higher yields driven by inflation, rather than stronger activity, tend to weigh on equities, pressure valuations, and challenge traditional diversification,” he said.
As investors continue to reassess inflation and policy risks, the UK bond market is likely to remain volatile, with borrowing costs sensitive to both global developments and domestic fiscal dynamics.
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