DATA & FIGURES
The yield on the UK's 10-year government bond jumped by as much as seven basis points on Tuesday, while the 10-year US Treasury yield climbed by more than five basis points on Monday. Brent crude surged more than 9% on Monday, its biggest one-day gain since May 2020, and is now trading at over $85 per barrel.
THE SCENARIO
The breakdown of the Iran ceasefire has led to a significant escalation of tensions in the Middle East, with the US and Iran engaging in a series of strikes and counter-strikes. This has led to a surge in oil prices, as markets worry about the potential disruption to global oil supplies. The increase in oil prices has, in turn, led to a rise in interest rates, as investors seek to protect themselves from the potential inflationary impact of higher oil prices.
DIRECT QUOTE
"Since the start of the Iran War, UK gilts have been especially volatile and the last couple of days have seen outsized movements in UK gilts." — Daniel Mahoney, Senior UK Economist at Handelsbanken
BBN INSIGHT
The surge in UK borrowing costs has significant implications for the UK economy, particularly in terms of the country's ability to finance its debt. The increase in interest rates will make it more expensive for the UK to borrow, which could lead to a reduction in government spending and a potential slowdown in economic growth. On the other hand, the increase in oil prices could lead to higher inflation, which could benefit some sectors of the economy, such as the energy sector. However, for most people, the increase in oil prices will be a negative, as it will lead to higher fuel costs and potentially higher prices for goods and services.
MARKET REACTION
The price of Brent crude has surged more than 9% in response to the breakdown of the Iran ceasefire, while the yield on the 10-year US Treasury has climbed by more than five basis points. The UK 10-year gilt yield has also jumped, rising to over 5% for the third time since the Iran war began.