How Bond Market Volatility Hurts the UK Economy

The war in the Middle East has upended the UK bond market. Gilts have performed worse than almost all of their global peers since the US and Israel launched strikes on Iran, in large part because of the UK’s dependence on imported energy.

Disruption to oil and gas flows out of the Persian Gulf have driven up energy prices and higher inflation now looms. That’s prompted investors to dump UK government bonds, in a retreat from what was previously one of the most popular bets in fixed income. At the same time, volatility in two-year gilt yields has reached levels last seen in 2022, when shortest-serving Prime Minister Liz Truss roiled the market with a debt-funded plan to cut taxes and resigned just weeks later.