UK gilt yields hit 28-year high as political turmoil spooks bond investors

Britain's 30-year borrowing costs have surged to levels not seen since 1998, reviving memories of the market crises that toppled past governments.

The UK's 30-year gilt yield climbed to 5.87% in mid-May, its highest since 1998, as investors priced in the combined risk of persistent inflation, deteriorating public finances and mounting political uncertainty ahead of local elections.

"The gilt market is pricing in a triple threat — sticky inflation, a fiscal deficit running at 5% of GDP, and the very real prospect of a fourth prime minister in five years," said John Authers, Bloomberg Opinion columnist. "That's a combination that historically ends badly."

The 10-year gilt yield peaked at 5.1%, an 18-year high, before retreating to around 4.8% as peace talks in the Iran conflict showed signs of progress. Even after the pullback, 10-year yields remain 58 basis points above their pre-war level. The selloff has been steeper than in other G-7 markets: UK 30-year yields now comfortably exceed those of the US, Germany and Japan. The Bank of England's rate path has flipped from pricing two cuts to nearly three hikes since the conflict began.

The rising cost of servicing Britain's £2.7 trillion debt pile threatens to trigger a debt-doom loop where higher interest rates slow growth and widen the deficit further. Chancellor Rachel Reeves' fiscal rules — which require debt to fall as a share of GDP by the end of this parliament — face their sternest test since the 2022 mini-budget crisis that ousted Liz Truss.

Political Instability Adds a UK Premium

The Labour Party is expected to lose hundreds of council seats in Thursday's local elections, and the party faces challenging national contests in Scotland and Wales. Over the weekend, speculation mounted about a potential leadership challenge to Prime Minister Keir Starmer, who would become the fourth UK premier to leave office in five years. Andy Burnham, the Manchester mayor and frontrunner to succeed Starmer, has pledged to stick to fiscal rules but is known as an advocate for higher public spending.

The political uncertainty compounds structural vulnerabilities. UK public debt has climbed to 100% of GDP, the budget deficit stands at around 5% of GDP, and inflation accelerated to 3.5% — with further upside risk from the Iran-driven energy price shock that pushed oil above $110 a barrel. The economy grew just 1.25% in 2025, leaving little room for tax revenues to absorb higher borrowing costs.

A Warning for the US

The parallels with the United States are difficult to ignore. US public debt is also near 100% of GDP, the budget deficit exceeds 6% of GDP, and inflation has accelerated to close to 4%. The 10-year Treasury yield has spiked more than 50 basis points to 4.6% since the Iran conflict began, while the 30-year Treasury yield hit 5.2% on May 20 — its highest since 2007.

Foreign investors hold about $8.5 trillion, or 30%, of outstanding US Treasuries, making the market vulnerable to a loss of confidence. President Donald Trump's attacks on Federal Reserve independence have added to concerns that the US might try to inflate away its debt burden. If November's midterm elections produce another period of divided government, the perception of political gridlock could harden — mirroring the dynamic now playing out in London.

"The last time the UK faced a bond market crisis of this magnitude, in September 2022, it took just weeks for the prime minister to resign and the entire fiscal program to be reversed," Authers said. "The question is whether the US is next."

This article is for informational purposes only and does not constitute investment advice.