Why did British government bonds bear the brunt of Iran’s collapse?

Hello. Welcome to this week’s CNBC UK Exchange. Since the US and Israel attacked Iran, gilts (short for gold-rimmed securities, the term for British government bonds) have been sold more aggressively than many other assets.

While this reflects certain factors about the UK economy and its prospects, the history books show that investors demanding a premium for holding UK government bonds over other government bonds is not a new phenomenon.

From a UK perspective, one of the most worrying aspects of the decline in risk assets following the Iran attack is that the UK government’s debt, gold, has depreciated more than bonds issued by other G7 countries.

Consider a 10-year gold bond. It is the most liquid and most widely traded of all gold maturities and is the best proxy for the UK government’s long-term borrowing costs.

At one point on Monday, before US President Donald Trump raised hopes for an end to hostilities, the yield (rising as prices fell) had reached 5.115%, the highest level since the global financial crisis in April 2008. It was 4.3% just before the US and Israel launched Operation Epic Fury on February 28th. The dispute has therefore increased Britain’s borrowing costs by more than 80 basis points.

Given the Independent Office for Budget Responsibility’s pre-conflict forecasts that the UK would spend £109.7bn ($147bn) on debt servicing in 2025-26 and £109.4bn in 2026-27, this has significant implications for the government’s ability to meet its fiscal targets in the event of a prolonged conflict.

Compare the UK’s rising borrowing costs with that of its peers. Over the same period, the yield on the 10-year German Bundestag rose by just 42 basis points, while the yield on German Bunds 10 year US bond The French 10-year OAT rose 48 basis points, while the French 10-year OAT rose 64 basis points. 10-year yields to maturity in all G7 countries remain significantly lower than 10-year government bond yields. Among comparable economies, only Australia has higher yields on 10-year bonds.

There are several reasons why gold yields have risen more rapidly than others. One is that the Bank of England’s policy rate is already the highest of the G7 central banks, and the UK’s inflation rate is higher than that of other central banks.

Second, interest rate expectations for the UK have changed more dramatically than for other G7 countries. Before the dispute, the central bank was expected to cut its key policy interest rate this month, further sharpening the reaction in government bond markets. Third, with the exception of Japan, no other G7 economy is as dependent on imported gas, and prices are soaring.

Fourth, investors hate British politics. Soaring energy prices are raising concerns that spending to support households will increase through higher taxes and increased borrowing that will destroy economic growth. They also fear that a poor performance by Theresa May’s ruling Labor party in local elections could lead to a leadership challenge to Prime Minister Keir Starmer and the possibility of his replacement by a more left-wing rival.

But demanding a premium to hold a gold medal is nothing new. This idea was recently reinforced most blatantly to the British public in September 2022, when gold sold hard after Liz Truss’s government announced a mini-budget containing £45bn worth of unfunded tax cuts. Market participants said investors were demanding an “absurd premium” to hold gold coins over bonds of comparable duration issued by peers.

Going back further, when the UK was removed from the European Exchange Rate Mechanism in September 1992, gold yields were the highest in the G7.

Previously, investors demanded large premiums to hold government bonds during the mid-to-late 1970s, when Britain was suffering the scars of high inflation from the oil crisis (reaching 26.9% in August 1975 and never falling below 19% that year). Britain was eventually forced to seek a loan from the International Monetary Fund in 1976.

This led to the election of Margaret Thatcher in 1979 and tough economic medicine that, over time, led to increases in British productivity and competitiveness.

At this point, it is difficult to foresee such an improvement.

British fintech company Revolut has reported record annual profits as it looks to catch up with the US. The startup, which reached a valuation of $75 billion in 2025, is one of Europe’s most valuable privately held technology companies.

Britain has responded to the Iran war energy shock by requiring all new homes to be equipped with solar panels and heat pumps. The British government introduced new rules on Tuesday that will require all new homes in the UK to be fitted with heat pumps and solar panels.

Inflation fears hit the gold leaf market, pushing the UK government’s borrowing costs to their highest level since 2008. The UK government’s borrowing costs rose last week to their highest level since the 2008 financial crisis.

— Holly Ellyatt

March 25: UK inflation statistics for February

March 27: Gfk Consumer Confidence Data for March

March 30: February BOE Mortgage Data