UK government bonds are experiencing a sharp decline, with yields rising past levels not seen since the fallout that led to the ousting of former Prime Minister Liz Truss.
This development raises fresh concerns that an energy-driven crisis is rapidly escalating into a broader problem affecting the government and households across the UK.
This warning comes from Nigel Green, CEO of the global financial advisory firm deVere Group, as UK Prime Minister Keir Starmer convenes an emergency COBRA meeting to address the fallout from the Iran war. Chancellor Rachel Reeves and Bank of England Governor Andrew Bailey are set to attend the meeting.
The focus of the meeting will be on energy security, inflation, and economic resilience.
Nigel Green commented, “What we are witnessing is the early stage of a dangerous chain reaction. A spike in oil and gas prices is directly influencing inflation expectations, and the bond markets are responding rapidly.”
The figures highlight the magnitude of the shift.
UK 10-year gilt yields have surged above 5% for the first time since the global financial crisis, while a benchmark index tracking conventional gilts has dropped nearly 5% this month alone, marking its worst performance since the turmoil that forced Liz Truss from office in 2022.
In just a few weeks, more than £100 billion has been wiped off the market value of UK government bonds.
Nigel Green emphasizes that the comparison with the Truss-era crisis is not about policy errors but about how swiftly markets can reprice risk when confidence is shaken.
“Under Liz Truss, it was a credibility shock triggered by fiscal decisions. Today, it’s an external shock originating from energy markets. However, the outcome is similar, with investors demanding higher yields, which in turn raises borrowing costs across the entire economy,” he explains.
The UK’s structural vulnerability is a critical factor.
“An overreliance on imported gas makes it particularly susceptible to global price surges, especially as tensions in the Middle East threaten vital energy infrastructure and supply routes,” Nigel Green warns.
He adds that inflation “could climb back toward 5%” if high energy prices persist, which would compel a reassessment of interest rate expectations.
“There’s increasing anticipation of a more hawkish stance from the Bank of England. This adds additional pressure because higher rates reinforce higher yields, creating a self-feeding cycle.”
For Chancellor Rachel Reeves, the policy options are becoming limited.
“Rising borrowing costs strain public finances at the same time political and economic pressure mounts to support households and businesses facing increased energy bills. Support measures may be necessary, but they come at a cost. The more the government spends, the more scrutiny it faces regarding sustainability. That tension can escalate quickly.”
The implications extend well beyond Westminster. Higher gilt yields ripple through the financial system, raising mortgage rates, increasing corporate borrowing costs, and tightening conditions for consumers.
Nigel Green emphasizes that the current situation illustrates a broader and often underestimated dynamic.
“Commodity shocks do not remain isolated. They transition into inflation, then into bond markets, and finally into the real economy. By the time it influences borrowing costs, everyone feels the impact—governments, businesses, and households alike.”
There is also an increasing risk of spillover effects into global fixed income markets. As investors reassess inflation and interest rate expectations, movements within one major bond market can rapidly affect others, particularly in a landscape already shaped by geopolitical uncertainty.
“The UK is currently at the forefront of this shift, but it is unlikely to be the only country affected,” Nigel Green asserts.
“If energy prices remain high, we could see similar pressures arise elsewhere.”
The emergency COBRA meeting underscores the urgency of the situation. Policymakers are confronting a rapidly evolving crisis in which an external geopolitical issue is directly impacting domestic economic stability.
Nigel Green concludes: “The lesson is clear—what begins as an oil and gas shock can quickly escalate into a financial crisis. The surge in gilt yields serves as an early warning sign.”
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