Another bout of turmoil in the bond markets is driving up government borrowing costs across the world, and the UK is in the firing line. Bond prices are falling, which pushes up the yield – or rate of return – on the debt. And just a moment ago, the yield on Britain’s 30-year gilts hit 6% for the first time since 1998.
The yield on shorter-dated UK bonds are also rising, which will drive up London’s borrowing costs and add to the pressure on chancellor John Healey ahead of the budget later this month. The bond sell-off is being driven by fears of high inflation, as the Middle East conflict continues to restrict oil supplies from the region. Last night, US 10-year Treasury yields hit their highest level since 2002, and earlier today Japan’s 10-year bond yield rose towards the 30-year high set last month.
US bonds weakened despite a lower than expected US inflation reading yesterday, which could have calmed investors’ nerves. But instead, traders remain anxious that the US Federal Reserve will continue to raise interest rates to fight inflation. Axel Rudolph, chief technical analyst at investing and trading platform IG, explains: “US bond yields are refusing to budge, with the 10-year yield hitting its highest level since 2007 despite softer-than-expected inflation.
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.
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