00:00The Middle East conflict has rattled markets around the world. But UK bonds have been particularly
00:05volatile. So, why does the UK seem so vulnerable?
00:09Gilts are heading for their worst months since a historic sell-off that led to the ousting
00:14of former Prime Minister Liz Truss. A benchmark for Britain's borrowing costs briefly topped
00:185% for the first time since the 2008 financial crisis. And traders have moved to betting
00:24on at least half a percentage point of rate hikes from the Bank of England this year.
00:29The UK is particularly exposed to the fallout of the war due to its reliance on imported
00:34energy, track record for sticky inflation and dependence on foreign borrowing. The rise
00:39in rates will make it harder for the government to meet its fiscal targets, an extra headache
00:43for Prime Minister Keir Starmer, who's already facing threats from within the Labour Party.
00:48Some say hedge funds' use of borrowed cash and their aggressive exit strategies during
00:52times of stress has worsened the volatility. And Bank of England Governor Andrew Bailey has
00:57cautioned against reaching any strong conclusions about the possibility of rate hikes.
01:02But even if Donald Trump's claim that the US is negotiating with Iran to bring an end
01:06to the conflict comes to fruition, oil and gas prices are unlikely to fall back to levels
01:12pre-conflict because the damaged energy infrastructure will take a long time to fix.
01:16The government is under pressure to help people with their energy bills, which is set to rise
01:20by 20% when an existing price cap expires in June. The question is whether the government
01:26can afford such support and how much extra borrowing bond investors will tolerate.
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