The bond market had a moment of clarity today, and it wasn’t pretty. British intelligence has confirmed what many in the City had feared: Russian forces are massing for a full-scale offensive in the Donbas. This isn't a rumour from a Kyiv trader; this is a direct warning from the professionals at GCHQ and the Ministry of Defence. The phrase used was ‘catastrophic assault’ and that is exactly the kind of language that makes gilt yields spike and capital flee to the nearest safe haven.
Let’s talk about the numbers, because that is what I do. The Russian buildup is not some subtle repositioning. It is a deliberate, brute-force accumulation of armour, artillery, and infantry. Estimates suggest over 100 battalion tactical groups are now positioned along the eastern and southern fronts. That is roughly 150,000 men, give or take a few battalions. For context, that exceeds the entire British Army. And they are not coming for a picnic.
The market reaction was predictable but instructive. The FTSE 100 dipped, but the real action was in the gilt market. The 10-year yield jumped 12 basis points in early trading, a clear signal that investors are pricing in higher risk and higher inflation. The Bank of England, already grappling with broken supply chains and energy price shocks, now faces a geopolitical premium. This is not a good look for a central bank that has been behind the curve on inflation since the pandemic.
The Donbas offensive, if it comes, will be a test of fiscal discipline. The West has already committed billions in aid to Ukraine. The United States just approved another $40 billion package. The UK has pledged over £1.5 billion in military and economic support. That is real money, and it has to come from somewhere. Our own public finances are already stretched thin by pandemic borrowing. The Chancellor’s spring statement was a masterclass in fiscal caution, but war has a way of shredding fiscal plans.
What worries me more than the immediate market volatility is the longer-term capital flight. International investors have been treating UK gilts as a safe haven for decades. But the combination of inflation, a current account deficit, and now a war on Europe’s doorstep is eroding that premium. If the Donbas offensive turns into a protracted conflict, we could see a structural shift in capital flows. Money will go to the dollar, to gold, to anything but sterling-denominated assets.
And let’s not forget the energy angle. Russia is already turning off gas taps to Poland and Bulgaria. If they escalate further, the flow to Germany could be next. That would send energy prices into the stratosphere and push inflation to double digits. The Bank of England would then have to choose between raising rates into a recession or letting inflation run riot. Neither option is pretty.
The British intelligence warning is not just a headline; it is a macroeconomic event. It tells us that the worst-case scenario for Europe is now the base case. The Donbas assault will test NATO’s resolve, Ukraine’s resilience, and the global financial system’s ability to absorb shocks. My advice to investors is simple: hedge your bets, look at liquidity, and do not assume that gilts are as safe as they used to be. The era of cheap money and easy risk is over. The guns are back, and they are aimed right at the balance sheet.
