UK Bond Yields Soar to 28-Year High as Political Turmoil Rocks Labour Government

The UK bond market is bruised this morning after a day of political turbulence drove up Britain's borrowing costs.

UK long-term bond yields hit their highest levels in 28 years on Tuesday. This happened as fears about a change of Labour leadership triggered investor jitters and warnings of further bond market turmoil. The 30-year UK government bond yield reached 5.81% before a small recovery.

In a dramatic turn of events, health secretary Wes Streeting didn't launch a challenge to Prime Minister Keir Starmer. This calmed the market.

The yield, or interest rate, on 30-year UK government bonds dropped by 4.4 basis points to 5.72% in early trading.

Benchmark 10-year UK bond yields also decreased to 5.06%. They're still over the 5% mark.

These are relatively small moves in borrowing costs. Crucially for Downing Street, they show that some calm is returning to the bond market.

The prospect of a challenge to Keir Starmer had wiped out the small recovery in UK short and long-term borrowing costs seen earlier in the morning.

Two, 5, 10 and 30-year bond yields were broadly flat. They ended up back where they were at the end of last night. This happened after political uncertainty triggered a surge in borrowing costs.

The UK government's borrowing costs are rising sharply. They're eroding the fiscal headroom built up by Rachel Reeves in last year's budget.

Goldman Sachs estimates that higher gilt yields and lower growth might reduce the government's fiscal headroom by around £12bn.

The jump in energy prices since the Iran war began is driving up inflation. This leads to higher borrowing costs when governments sell debt to bond investors.

It also fuels the cost of living crisis. This leaves households with less money to spend in the economy, hurting growth.

The International Energy Agency warned that global oil stocks are being run down at a record pace. This is happening as supply losses mount due to the ongoing Iran war.

In its latest outlook report, the IEA reported that global oil inventories fell by 129 million barrels in March. They fell by a further 117 million barrels in April.

The IEA forecasts weaker demand this year. This is because the jump in prices for crude oil and refined products leads to demand destruction.

World oil demand is forecast to contract by 420,000 barrels per day this year. It's expected to be 104m bpd.

The petrochemical and aviation sectors are currently most affected. However, higher prices, a weaker economic environment and demand-saving measures will increasingly impact fuel use.

The average wheat farmer in the UK could make a loss of £70,000 on their 2027 crop. This is because costs are skyrocketing due to the war in Iran.

The crisis in the Gulf has caused shortages of supplies. This is according to new analysis from the Central Association for Agricultural Valuers.

The economic outlook means farmers could be making difficult decisions. They might leave fields fallow.

Jeremy Moody, the secretary of the CAAV, described the crisis in the Gulf as the 'fifth hammer blow to arable economics'.

He added that many farmers will be in a worse position than that. Some will be better.

The overall position points to discussion of what areas might not be planted this autumn. This is rather than voluntarily spending money to incur that loss.

Rachel Reeves's headroom to stick within her fiscal rules has shrunk by at least £11bn. This is due to the Iran war.

Analysts estimate that the hit to headroom from the likely Middle East events-related forecast revision looks to be £11 billion.

The UK stock market has opened higher. The mood is brightening in the City.

The blue-chip FTSE 100 share index is up 66 points. It's up 0.65%, at 10,331 points.

Mining stocks are among the risers. This is following a rise in the copper price this week.

The more domestically focused FTSE 250 index is up 0.4%.

Despite the jump in UK bond yields yesterday, the cost of two-year fixed-rate mortgages has dipped slightly.

Data provider Moneyfacts reports that the average 2-year fixed residential mortgage rate today is 5.74%. This is down from 5.75% yesterday.

The average 5-year fixed residential mortgage rate today is 5.67%. This is unchanged from yesterday.