Good morning. The market for UK government bonds, or gilts, has been the source of unusual attention this week. That’s never a good sign. The yield on UK 10-year debt is at its highest level since 1998.

In case you haven’t been following along, the cause this time — as always — is the country’s penchant for manufacturing political crises out of a period of relative stability. The results of local elections on May 7 have thrown the government of Prime Minister Sir Keir Starmer into a tailspin, as contenders for the throne threaten and then fail to launch challenges to his leadership of the Labour Party. This matters to bond markets because there’s a reasonable chance that whoever succeeds him will tack left and increase borrowing beyond the government’s fiscal rules.

It has become a cliché to observe that UK debt is the worst-performing in the G7. This is true in nominal terms. The spread between UK and US 10-year yields is almost 60 basis points, or 0.6 per cent. It is also true that UK yields have risen the most among peers.

But to more fairly compare the UK’s performance against other developed markets we need to look at yields in local currency terms. The simplest way to do this is to take the yield on each country’s debt and compare it to swap rates, which reflect the market’s expected path of future interest rates. Swaps are agreements to exchange fixed-rate for floating-rate interest payments on a financial instrument. When you account for interest rate expectations by subtracting the swap rate, gilts have actually changed very little in their performance this year.

Moreover, this has not occurred in isolation. Government bonds, particularly the longer-dated ones, are the target of a global sell-off, pushing up yields internationally. The reasons for this are what you’d expect: higher interest rate and inflation expectations as a result of the shock from the Iran war. So, this is not a great situation, for a number of reasons, but when you accurately compare bonds between currencies, the UK is not such an outlier.

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