The turmoil in global bond markets has intensified amid fears the US deficit is reaching unsustainable levels, helping drive UK long-term borrowing costs to a 28-year high.
The threat of a renewed round of inflation from the persistently high cost of oil has spooked investors, who believe central banks will be forced to raise rates in the coming months to prevent price increases from becoming embedded.
In a morning of hectic trading on Thursday, the yield, which is a proxy for the interest rate, hit 6% on Britain’s 30-year bonds for the first time since 1998.
The yield on five- and 10-year UK bonds also rose, driving up the government’s borrowing costs and adding to the pressure on the chancellor, John Healey, before the budget later this month.
Stock market investors also sold heavily, knocking 1.7% off the London stock market in early trading. Bourses in Europe were also hit, with Germany’s Dax and France’s CAC 40 falling by 1.1%.
“There is carnage in the bond market which is hitting stocks hard,” warned Neil Wilson, Saxo UK Investor Strategist. “It looks like the relentless rout in the bond market is sending investors running for cover.”
The bond sell-off around the world is being driven by fears of high inflation, as the Middle East conflict continues to restrict oil supplies from the region.
On Wednesday, US 10-year Treasury yields hit their highest level since 2002, while Japan’s 10-year yield rose towards the 30-year high set last month.
US bonds weakened despite inflation data on Wednesday coming in lower than forecast, which was expected to calm investors’ nerves about the prospect of further increases in the cost of borrowing by the US Federal Reserve.
Traders remain anxious that the Federal Reserve will continue to raise interest rates to fight inflation, mainly in response to the strength of the economy and the prospect of workers bidding up their wages.
Mohit Kumar, an economist at Jefferies, said there was growing concern at the amount of debt being issued to fund government deficits, as well as inflation concerns.
“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, the chief technical analyst at the investing and trading platform 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.”
