UK Political Crisis Intensifies, Gilt Yields Surge

The UK bond market experienced a new round of selling on Tuesday morning. CNBS data shows that at 8:41 London time, the UK 10-year government bond yield rose by 10 basis points to approximately 5.103%, reaching a new high since July 2008.

Political risk is re-entering the UK bond market pricing. After a poor performance in the local elections last week, more than 70 Labour MPs demanded that Prime Minister Keir Starmer resign. The market is concerned that leadership changes may weaken fiscal discipline and increase future expenditure expectations.

For the bond market, expectations of fiscal expansion usually imply higher debt issuance pressure and a more difficult path to control inflation. The rise in yields to multi-year highs reflects investors' demands for higher returns to compensate for the policy uncertainties associated with holding UK government bonds.

External shocks are also amplifying this pricing pressure. After US President Trump called Iran's latest response to peace proposals "unacceptable," Brent crude oil prices rose above $105 per barrel. The uncertainty of the ceasefire prospects between the US and Iran has once again raised the risk of energy prices. The rise in oil prices will increase inflation expectations and compress the space for the Bank of England to shift towards easing.

Investors have increased their bets on further rate hikes by the Bank of England, with the market currently factoring in the expectation of nearly three additional rate hikes before the end of the year.