Energy bills bailout speculation sparks bond sell-off fears
An unfunded government intervention to subsidise household energy bills would trigger a gilt market rout likely to push the UK’s long-term borrowing costs to the highest they have been since 1997, bond investors and economists have warned.
David Zahn, head of European fixed income at Franklin Templeton, told Morning Wire that the prospect of ministers stepping in to offset rising energy bills nationally would be “significantly negative for gilt yields”, and could spark a sell-off that would carry long-term borrowing costs significantly higher.
“Markets may interpret this as the first step in a broader spending increase trajectory, requiring additional gilt issuance to fund these commitments,” he said. “We expect the long end of the curve to bear the brunt of any sell-off, with 30-year yields potentially revisiting levels near 6 per cent.”
The sustained conflict between the United States and Iran in the Middle East has triggered a sharp rise in oil and gas prices, because of the Iranian regime’s stranglehold over a vital shipping lane out of the Persian Gulf. Europe’s natural gas prices have climbed some 54 per cent since the US’s first wave of strikes on the region, while Brent Crude – the global benchmark for oil prices – has risen over 40 per cent.
Starmer opens door to energy bills support
The sharp market movements and the absence of an immediate sign that shipping volumes will be restored in the Strait of Hormuz have bred fears that UK households and businesses may face another energy shock redolent of the one that followed Russia’s 2022 invasion of Ukraine.
Keir Starmer has already confirmed the government will introduce a package worth £53m to support some of Britain’s poorest households with the cost of heating oil, which has nearly doubled for some families since the onset of the conflict.
But in his speech announcing the measure on Monday, the Prime Minister also opened the door to a wider, more costly intervention should the elevated prices persist into the summer, when the energy price cap for customers will be reevaluated.
“It’s moments like this that tell you what a government is about,” he said. “My answer is clear. Whatever the challenges that lie ahead, this government will always support working people.”
But since then, several bond investors and analysts have warned that any comprehensive support package would be likely to spark a further rise in government borrowing costs, which have already climbed dramatically on fears an energy crisis would stoke inflation.
The week that followed the US and Israel’s initial strike on Iran saw gilt yields, which move inversely to gilts themselves, climb the most since Liz Truss’s fateful mini-Budget sparked a crisis in the UK bond market. The interest rate on the two-year gilt, which tracks interest rates more closely than longer term debt, has risen by more than half a percentage point since the onset of the conflict, as traders wrote off the prospect of the Bank of England reducing borrowing costs in the near future.
Helen Thomas, chief executive of Blonde Money, told Morning Wire that any unfunded promise would reignite fears over the UK’s fiscal rectitude, compounding the inflation-driven gilt yield climbs of the past fortnight.
She said: “Whatever is announced, the government is going to struggle to convince investors that it can be funded particularly without stoking the persistently stubborn inflation in the economy. All of which adds up to the risk of a steeper UK yield curve from here.”
Borrowing costs climb sharply on inflation fears
Government borrowing costs had been slowly falling over the first few months of 2026, thanks to a succession of softer inflation readings and better than expected government borrowing figures in January.
But Zahn’s prediction of a return to a near-six per cent yield on the 30-year gilt – the UK’s longest dated bond – would represent the highest long-term borrowing costs for the UK government this century, far outstripping even the aftermath of the mini-Budget.
Any national package for households will reopen the scars wrought by Truss’s fiscal intervention, at which the short-lived Prime Minister confirmed a £50bn support package to keep energy bills down alongside a glut of tax cuts. The historic fiscal loosening triggered a bond market crisis that forced the Bank of England to intervene and buy up government bonds from forced sellers.
Richard Carter, head of fixed interest research at Quilter, said: “The gilt market is wary of both the inflation impact of the Iran conflict as well as a potential hit on the public finances. This could come from additional military spending as well as an intervention in the energy market. Rachel Reeves does have a certain amount of fiscal headroom but this could be used up pretty quickly if the war continues.”
Matthew Amis, investment director at Aberdeen, added: “The UK always walks a fine line when it comes to its fiscal position. Any extra funding required to soften the impact of increased energy bills would undoubtedly get the markets attention. However, it’s worth pointing out this is not 2022 all over again. The rise in natural gas has been large but nowhere near the rise in 2022, in addition the UK’s fiscal situation is not as weak as 2022.”