Global bond markets saw another day of intense selling on Thursday, with UK long-term borrowing costs reaching a 28-year high. The yield on Britain's 30-year bonds hit 6% for the first time since 1998, driven by fears that the US deficit is becoming unsustainable and that persistent high oil prices could reignite inflation.
Yields surge across UK and US
During hectic morning trading, the yield on five- and 10-year UK bonds also rose, increasing the government's borrowing costs and adding pressure on Chancellor John Healey ahead of the budget later this month. The sell-off extended to US markets, where 10-year Treasury bill yields reached 5.34%, the highest in 24 years, and 30-year Treasury yields climbed above 5.67%, a level not seen since May 2002.
Stock markets felt the impact too, with the FTSE 100 in London falling 1.7% in early trading. Germany's Dax and France's CAC 40 both dropped by 1.1%.
Investors seek cover amid bond rout
“There is carnage in the bond market which is hitting stocks hard,” said Neil Wilson, investor strategist at Saxo UK. “It looks like the relentless rout in the bond market is sending investors running for cover.”
By midday in the UK, the sell-off had eased, pulling the 30-year bond yield back below 6% and lifting share prices off their lows. However, yields pushed higher again in afternoon trading, returning above the 6% mark.
Inflation and deficit concerns weigh
The worldwide bond sell-off is being driven by fears of high inflation, as the Middle East conflict continues to restrict oil supplies from the region. Japan's 10-year yield rose towards the 30-year high set last month.
US bonds weakened despite Wednesday's inflation data coming in lower than forecast, which had been expected to calm investors' nerves about further rate increases by the Federal Reserve. Traders remain anxious that the Fed will continue to raise interest rates to fight inflation, mainly in response to the strength of the US economy and the prospect of workers bidding up wages.
Mohit Kumar, an economist at Jefferies, noted growing concern over the amount of debt being issued to fund government deficits, alongside inflation worries. “Inflation, deficit and issuance concerns continue to weigh on the bond market,” he said. “There is also a buyers’ strike as investors do not want to step in till we get some form of stability. Hedge funds have suffered in the latest round of sell-off and do not have the risk appetite to fade the move. Real money, potentially has the risk appetite, but won’t step in till we get some stability.”
Axel Rudolph, chief technical analyst at IG, said: “While the latest data has reduced expectations of an October Fed rate hike, investors remain wary that persistent inflation and higher oil prices could keep rates elevated for longer. The dollar is benefiting from that caution, climbing to a three-month high, while the prospect of a December rate increase keeps pressure on bond markets.”
