UK Gilt Yields Spike 80bps Post-Iran Attack, Outpacing G7 Peers
After the February 28, 2025 Iran attacks, UK gilt yields surged to 5.115%, a 17-year high, with the sell-off more severe than in other G7 nations. Borrowing costs rose over 80 basis points due to factors like high UK interest rates, inflation, gas dependency, and political uncertainties. Historically, gilts have carried a risk premium during instability, from the 2022 mini-budget to the 1970s inflation crisis. This spike threatens UK fiscal targets, while other market news includes Revolut's profit and new home energy mandates.
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UK government bonds, or gilts, experienced the sharpest sell-off among G7 nations following the U.S. and Israeli attacks on Iran on February 28, 2025, with 10-year yields surging to 5.115%, their highest since 2008.
Gilt Yield Surge to Multi-Year Highs
On Monday, before U.S. President Donald Trump indicated a potential end to hostilities, the yield on the 10-year gilt rose to 5.115% from 4.3% immediately before the conflict, marking the highest level since the global financial crisis in April 2008.
Comparison with Other G7 Economies
The increase in UK borrowing costs was more pronounced than in peer nations:
10-year German bunds rose by 42 basis points.
10-year U.S. Treasuries increased by 48 basis points.
10-year French OATs climbed by 64 basis points.
All G7 10-year yields remain lower than UK gilts, with only Australia having a higher yield among comparable economies.
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Factors Driving the UK Premium
Several specific factors contributed to the severe gilt sell-off:
The Bank of England's policy rate was already the highest among G7 central banks, and UK inflation exceeds that of peers.
Interest rate expectations shifted dramatically; the BoE was anticipated to cut rates this month prior to the conflict.
The UK's heavy dependence on imported gas, whose prices have surged, exacerbates economic pressures.
Domestic political concerns, including fears of increased spending or borrowing due to energy prices and potential leadership changes ahead of May's local elections, dampen investor sentiment.
Historical Context of Gilt Premiums
Investors demanding a premium for gilts is not unprecedented:
In September 2022, following the Truss mini-budget, gilt yields spiked violently, with markets citing a "moron premium."
In September 1992, the UK's ejection from the European Exchange Rate Mechanism led to high gilt yields.
During the 1970s, high inflation—peaking at 26.9% in 1975—forced the UK to seek an IMF loan, later addressed by Thatcher-era reforms.
Implications for UK Fiscal Policy
The Office for Budget Responsibility forecasts £109.7 billion in debt servicing for 2025-26. The 80+ basis point rise in borrowing costs could severely impact the government's ability to meet fiscal targets if the conflict drags on.
Other Market Updates
Revolut reported record annual profit as it prepares for a U.S. expansion, maintaining its $75 billion valuation.
The UK government introduced rules requiring solar panels and heat pumps in all new homes in response to energy shocks.
UK borrowing costs hit their highest level since 2008 amid inflation fears.
