UK government bonds, known as gilts, have experienced a sharper sell-off than any other G7 sovereign debt following the US and Israel's attack on Iran, dubbed Operation Epic Fury on February 28 [1]. The yield on the 10-year gilt, considered the benchmark for UK government borrowing costs, surged to 5.115% at one point on Monday, a level not seen since April 2008 during the global financial crisis. Prior to the conflict, the yield was 4.3%, indicating that the geopolitical turmoil has added over 80 basis points to UK borrowing costs [1].
This spike in yields has significant fiscal implications. According to pre-conflict forecasts from the Office for Budget Responsibility, the UK was expected to spend £109.7 billion ($147 billion) servicing its debt in 2025-26 and £109.4 billion in 2026-27. The increased borrowing costs threaten the government's ability to meet its fiscal targets if the conflict persists [1].
Compared to other G7 economies, the rise in UK yields is notably steeper: German 10-year bund yields rose by 42 basis points, US Treasuries by 48 basis points, and French OATs by 64 basis points. All G7 10-year yields remain substantially lower than UK gilts, with only Australia among comparable economies posting higher yields [1].
Several factors contributed to the outsized move in gilts: the Bank of England's policy rate was already the highest among G7 central banks, UK inflation was elevated relative to peers, and interest rate expectations shifted more dramatically for the UK. Prior to the conflict, the Bank of England was expected to cut its main policy rate this month, intensifying the reaction in gilts. Additionally, the UK's heavy reliance on imported gas, whose prices have surged, and political uncertainty—especially concerns about increased government spending or borrowing to support households—have further undermined investor confidence [1].
CONCLUSION
The UK gilt market has reacted more severely than its G7 counterparts to the Iran conflict, with yields reaching levels not seen since 2008. Elevated borrowing costs pose a challenge to the government's fiscal targets, and ongoing geopolitical and domestic uncertainties may continue to weigh on investor sentiment. The market impact is high, reflecting both global and UK-specific risks.