While world financial markets contend with rising geopolitical tensions and economic volatility, Britain is witnessing a steep rise in borrowing costs. The price of long-term government borrowing has reached worrying levels for the first time since 1998, with 30-year gilt yields increasing by as much as 0.25 percentage points to 5.65%. It reflects increasing investor anxiety and the highest level in nearly three decades.
The ripple effect did not abate. Returns on 10-year gilts also rose, adding more pressure on Chancellor Rachel Reeves. Confronted with the stern reality of an international slowdown, she has been attempting to reconcile economic obligations and political promises. Last month, she pushed a package of welfare reforms and cost-cutting legislation through in a desperate attempt to keep public finances in line with the rules she imposed on herself. But as borrowing costs rise, the margin for manoeuvre is rapidly narrowing, and speculation is increasing that Reeves will need to increase taxes in the autumn to prevent a deeper squeeze on finances.
Most of this economic instability is being fueled by the strengthening trade tensions, led by the United States, China, and the European Union. In a move that heightened tensions considerably, China announced that from Thursday, it will apply a retaliatory 84% tariff on US goods. This is a 50% raise on a previously announced 34% rate. Beijing’s ministry of finance confirmed the action, calling it a direct reaction to US policy under President Donald Trump.
Donald Trump planted a memorial tree in the White House just ahead of US tariffs implementation.
That symbolic gesture now appears to be a freeze frame from a more tranquil era, as world markets prepare for further turmoil. Trump’s protectionist trade policies have unleashed a domino effect that is remaking the global economic order. The European Union has entered the fray as well, approving a €21bn tariff package targeting US exports. Protectionism is piling up on both sides, and with cooperation scarce, economic friction is becoming business as usual.
In the face of escalating tension, influential financial institutions and policymakers are weighing in. A top US Federal Reserve rate setter warned economic growth will “slip materially,” joining a dark-chorused refrain of recession predictions. JP Morgan CEO Jamie Dimon wasn’t shy either, describing a US recession as a “likely outcome” based on the current path of world events.
This pessimistic prognosis is already taking a toll on markets. Investors are selling US Treasuries—traditionally the world’s safest asset class—at an increasingly rapid rate. That movement is destabilizing confidence in the overall bond market, pushing yields up not only in the US and UK, but in much of the developed world.
For Britain, this is bad news. Not only are borrowing costs for the government increasing, but the volatility also translates into consumer markets. Mortgage rates will likely follow suit, and firms reliant on borrowing to finance investment will soon see their business models under pressure. All this piles on the financial squeeze on households, particularly as inflationary pressures continue.
The wider backdrop here is one of declining confidence and increasing risk. Investors no longer believe that conventional financial havens can offer the protection they used to. That anxiety is driving a sell-off in the bond market, which in turn is increasing the cost of borrowing for governments. For Rachel Reeves, the timing could not be worse. At the moment she is trying to steady the UK’s fiscal ship, external shocks are making it much more difficult.
Global financial interconnectedness is such that what begins in Washington or Beijing soon reaches London, Paris, and the rest of the world. Britain’s prosperity is now tied to the whims of decisions thousands of miles away. Whether it’s a trade war ignited by tariffs, or a change in investor sentiment in the US bond market, the effect is felt domestically—through increased borrowing costs, reduced growth, and tighter budgetary pressures.
Reeves is now on a fiscal tightwire. One is the imperative of keeping markets credible by adhering to borrowing discipline. The other is the economic and political need to feed growth and protect weak citizens from the worst impacts of the downturn. Additional tax hikes may be profoundly unpopular, but they may be necessary if interest rates keep rising.
There is more at play here than a bit of market shake. It indicates a major shift in how the world economy functions. Governments are having to make tough choices, financial institutions are under pressure, and global trust is eroding. These choices will make a lasting difference to public services, economic strategy, and everyday life in the UK.
Britain—and the world at large—will have to weather a future of unpredictability since global volatility heightens and assumptions about finance take a hit. The economic decade ahead may well be defined by how governments and markets respond now.
