UK borrowing costs hit 18-year high as leadership uncertainty rattles gilt markets
The UK government’s cost of borrowing just hit a level that predates the euro as a physical currency. Thirty-year gilt yields touched 5.807% on May 13, the highest since 1998, while 10-year yields punched through 5.11%, a number the market hasn’t seen since the 2008 financial crisis was rewriting the rules of modern finance.
The catalyst this time isn’t a banking collapse. It’s something arguably messier: political uncertainty around Prime Minister Keir Starmer’s future, compounded by an energy-driven inflation problem that’s proving stubbornly resistant to policy fixes.
What’s driving the yield spike
Anticipated poor local election results for the Labour Party have fueled speculation about a potential leadership challenge against Starmer. The names being floated as possible successors, Andy Burnham and Angela Rayner, are both perceived as more fiscally liberal. In English: markets are pricing in the possibility that whoever comes next might borrow even more.
Then there’s the energy problem. The UK is the most exposed nation in the G7 to Gulf conflict-driven inflation, largely because of its dependence on natural gas imports. Rising gas prices have kept inflation stubbornly elevated, and the Bank of England may need to hike rates to 5.25% if energy costs don’t ease.
UK borrowing costs now lead all G7 peers, a dubious distinction that’s emerged rapidly over roughly the past two months since the Gulf conflict escalated. For context, the last time 30-year gilts were at these levels, Tony Blair was still in his first term, Google was being incorporated, and nobody had heard of quantitative easing.
The Truss crisis parallel, and what’s different
British political chaos sending gilt yields into orbit has a recent, painful precedent. In September 2022, Liz Truss’s unfunded mini-budget triggered a full-blown gilt market crisis that nearly took down several pension funds and ended her premiership after just 49 days.
The Bank of England intervened aggressively during the Truss crisis with emergency bond-buying. Whether it would do the same now is less clear, particularly if the institution is simultaneously trying to combat inflation through rate hikes. You can’t easily tighten and loosen monetary policy at the same time.
Why crypto markets are paying attention
Bitcoin rose 5% to $68,200 on May 13 as gilt yields surged, a pattern that echoes the 2022 Truss crisis, when BTC gained roughly 20% in the weeks following the initial gilt market panic.
UK-based Bitcoin accumulation has reportedly been rising amid fears that traditional fiat markets are under stress. Institutional holdings have already exceeded $2 billion in BTC through ETFs.
What investors should watch is the Bank of England’s next move. If the BoE hikes to 5.25% while gilt yields keep climbing, the strain on UK mortgage holders and businesses could accelerate capital flight from sterling assets.
