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But, this tailwind can very quickly turn into a headwind.
The British pound trades near weekly highs against the euro and dollar following another jump in UK bond yields as investors account for a future of elevated inflation and rising political risks.
The yield on British bonds, of all tenors, rose notably on Tuesday, outpacing the rise in yields in other G10 nations. The bonds rose because investors sold the underlying bonds.
That relative outperformance on yield translated into another robust performance by GBP, although no fresh highs were recorded.
The pound-euro exchange rate once again bumped its head on the 1.16 ceiling, a level it will struggle to cross, while pound-dollar rose back to the ceiling at 1.36.
Two-year bond yields rose as investors continued to account for a future of higher inflation levels and a higher Bank Rate at the Bank of England. Longer-term yields accounted for these expectations, but also reflected some building anxiety about the risks of holding British debt in light of a potential period of political instability (this is known as the term premium: a higher bond yield simply means lenders demand a higher return for exposure to this debt).
The UK two-year yield rose to 4.522%, the ten-year went as high as 5.10%, a joint high with March and, before that, a level last seen in 2008.
Above: UK two-year yield minus German 2-year (top) and GBP/EUR.
Although yields also rose in Germany, the EU, U.S. and across the spectrum, Britain saw a much more notable move.
"The yield gap between UK and German 10-year government bonds is now nearly two full percentage points. While global yields are up across the board," says Mohamed A. El-Erian, advisor to Allianz and former CEO of Pimco.
International capital tends to flow from lower yielders to higher yielders, which is why this dynamic can support GBP exchange rates.
However, there's a rub for the pound: bond yield outperformance is supportive of the currency until all of a sudden it's not, i.e. rising bond yields can trigger panic selling of the underlying bonds if markets think there's too much risk to factor in.
"Another asymmetric movement higher in UK bond yields - speaks to the double jeopardy of events in the Gulf and (post election) political risk in the UK at the end of the week. Spread of UK 10-year Gilts over rG7 max up to 64bp - a new high.... Not a great look," says Simon French, Chief Economist at Panmure Liberum.
Above: GB 10-year bond yields are at levels last seen in 2008.
When that happens, the pound tends to fall alongside bond prices and rising bond yields: We saw it when Liz Truss tried to pass her mini budget, and we saw it on a couple of occasions last year when Rachel Reeves' spending and tax plans were called into question.
"The economic implications differ: This UK premium creates a bigger headwind for domestic growth and puts more pressure on the Treasury compared to Eurozone peers and the US," says El-Erian, of Britain's relatively faster rise in yields compared to elsewhere.
If Britain's yields were higher because of strong growth, the pound would also be much higher. However, we think the pound is not fully following bond market developments owing to perceived risks.
A key concern for markets is the impending local election in England and the devolved administrations of Scotland and Wales. Prime Minister Starmer's Labour Party is set to lose thousands of seats and Westminster is awash with talk of leadership contenders.
Former Vice Prime Minister Angela Rayner is said to be on manoeuvres and her policy platform reads like a socialist's dream. As does that of Andy Burnham. Both would likely require the government to break the fiscal rules that ensure borrowing is kept in control.
The market is asking whether the UK can afford these projects. And even if Starmer stays, he will likely change policy to please would-be supporters of Rayner and Burnham.
"Renewed challenges to Prime Minister Keir Starmer's leadership, particularly following the May 2026 local elections, represent a major risk of political instability. A leadership change could unnerve markets and lead to a sell-off in sterling," says Sergio Capaldi, Fixed Income Strategist at Intesa Sanpaolo.