The UK government’s long-term borrowing costs rose on Tuesday to a 28-year high amid rising fuel prices and concerns about political stability at Westminster.
The yield on the UK’s 30-year debt securities rose 13 basis points to 5.78%, the highest since 1998.
The selloff of UK debt securities affected bonds of all maturities — with 10-year bonds above 5%.
With oil prices above $100, some investors fear inflation could force the UK central bank to raise interest rates even further. Markets are now pricing in three quarter-point rate hikes this year.
Investors are also concerned that the governing UK Labour Party is heading for big losses in Thursday’s regional and local elections and that Prime Minister Keir Starmer could face a leadership challenge.
Any replacement to Starmer could face pressure to further increase UK government borrowing.
On April 23, latest figures from the UK’s Office for National Statistics (ONS) showed UK government borrowing in the financial year ending (FYE) March 2026 was initially estimated at £132 billion.
The ONS said UK government’s current £2.91 trillion of debt was provisionally estimated at 93.8% of GDP.
Interest payable on UK central government debt increased by £12.2 billion to £97.6 billion for the year.
“It’s a reflection of the lack of love towards gilts,” said Mizuho International strategist Evelyne Gomez-Liechti.
Luke Hickmore, investment director for bonds at Aberdeen Investments, said markets are actively pricing the outcome of the elections.
Hickmore said: “Politics is not background noise. In today’s gilt market, it is a fundamental part of the investment signal.”
James Lynch, Investment Manager at Aegon Asset Management, said: ”The interaction between the UK political situation and the Gilt market has been a constant theme since 2022, sometimes a high level of sensitivity and sometimes low, but always there.
“For the Gilt market, it is not that there is a binary good/bad outcome of the regional and local elections this Thursday, it’s what comes next. How many seats the Green party or Reform get is not going to impact the Gilt market.
“What is going to impact the Gilt market is the fiscal policies of the government of the day and that is of course down to the leadership. If there is a change of leadership of the Labour party because of the results of the regional and local elections, that is where the elections will become consequential.
”Will there be a leadership change? The market does think the results of the elections will matter, but it’s not the only variable, it needs a leadership challenge to materialise.
“If the results of the elections are a disaster for the Labour party but no leadership challenge occurs or no cabinet reshuffle that removes Reeves as Chancellor – then the Gilt market will move on.
”However, there is an acknowledgement that change does seem inevitable, whether the election results is the final catalyst or not we will have to wait and see.”