The British bond market is struggling with rising inflation pressures and the effects of the war in Iran. On Friday the yield on 10-year government bonds exceeded 5%, the highest level since the global financial crisis in 2008. Experts indicate that this is the result of the escalation of the conflict and the increase in energy prices, which increases the inflation risk and influences investors' decisions.
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For comparison, before the US and Israel attack on Iran it was 4.2%, and almost 5%. was the yield on Polish bonds at that time. These three weeks have changed a lot.
Britain's debt stood at 93.1% in February. GDPwhich means that at current interest rates, almost 5% could be spent on servicing it. country's GDP. This would be if the entire debt had an interest rate as indicated by the current quotations of 10-year bonds.
Poland suffers even more from the current situation on the financial market, because the yield on Polish 10-year bonds increased by 0.9 percentage points, while the yield on British bonds increased by 0.76 percentage points. The thing is that Polish public debt, according to Business Insider calculations, at the end of 2025 amounted to 59%. GDP, so the increase in profitability of the entire economy will not cost the economy as much as in Great Britain.
The war in Iran caused a sharp increase in oil and gas prices, which affected all countries that rely on energy imports, including the UK. Since the beginning of the conflict, the yields of 2-year British bonds have increased by as much as 0.97 percentage points. On Friday, the yield on shorter securities reached 4.602%, which is the highest result in over a year.
War and inflation hit the bond market
Why are interest rates rising? The market expects inflation to increase. British bonds, known as gilts, are particularly sensitive to changes in inflation expectations.
Nigel Green, president of deVere Group, noted to CNBC that markets are retreating from earlier forecasts of interest rate cuts by the Bank of England. He said that “shocks in the oil and gas market immediately translate into inflation expectations, and gilts respond as expected.” He also added that the current situation is not a chaotic sell-off, but rather an understandable risk pricing adjustment.
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The Bank of England, in response to rising inflation, left the main interest rate at the current level. However, most investors expect price increases later this year, which further increases pressure on the bond market. According to LSEG data, markets assume that the main rate will be at least 4.25 percent by the end of the year.
Fiscal policy under the microscope
Rising bond yields complicate the situation for Finance Minister Rachel Reeves, who has pledged to maintain fiscal stability. Its rules assume that current state expenses will be covered from tax revenues, and public debt in relation to GDP will decrease by the 2029/30 financial year. However, higher debt servicing costs limit budget options, especially in the face of growing pressure to support households and energy consumers.
Read also: Polish bonds under pressure after the attack on Iran. Intervention of the Ministry of Finance is possible
George Godber, manager of the Polar Capital UK Value Opportunities Fund, emphasized that in such situations it is crucial to remain calm. “History shows that in moments of uncertainty it is best not to make rash decisions,” he told CNBC.
Even before the conflict escalated, Great Britain had the highest debt servicing costs among the G7 countries. Yields on 20- and 30-year bonds had previously exceeded the 5% mark, and on Friday they rose by 9 and 7 basis points, respectively.
For comparison, 10-year American bonds are quoted with a yield of 4.4 percent, German ones with a yield of 3 percent, French bonds with a yield of 3.7 percent, Italian bonds with a yield of 3.9 percent, Japanese bonds with a yield of 2.3 percent, and Chinese bonds with a yield of 1.8 percent.
