The Iran conflict is slamming UK government bonds, known as gilts, with unprecedented force. UK 10-year borrowing costs surged to an 18-year peak of 5 per cent on Friday, marking a 0.78 percentage point rise since the war began. This follows a brutal sell-off in shorter-dated debt, pushing the market towards its worst month since the 2022 crisis that followed the 'mini' Budget.

Chancellor Rachel Reeves' claim of economic 'stability' is now severely undermined. While other major bond markets like Germany and the US saw smaller increases (0.41 and 0.37 points respectively), the UK's bond market is bearing the brunt. 35 per cent of UK energy demand relies on natural gas, heating most homes, making the economy far more vulnerable to oil and gas price shocks than Europe or the US, which is a major energy exporter. This vulnerability, combined with persistently high UK inflation (already 3% pre-crisis vs. 1.9% in the Eurozone), is forcing the Bank of England to keep rates high, deterring investors and pushing yields sharply higher.

Speculative investors, particularly hedge funds, are amplifying the volatility, creating a 'volatility loop' that has triggered violent sell-offs, including a 1 percentage point jump in two-year yields this month. The market's dramatic shift, from expecting rate cuts to anticipating potential hikes, reflects deep concerns about the UK's £250bn annual borrowing needs and the potential need for further fiscal support against energy costs, threatening to widen the deficit beyond the £22bn 'wriggle room' Reeves had in her Spring Statement.