Global bond market turmoil pushes UK and US borrowing costs to multi-decade highs

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 interest 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.

The sell-off also drove US government borrowing costs to 24-year highs on Thursday, with 10-year Treasury bill yields hitting 5.34%.

Thirty-year US Treasury bond yields rose above 5.67%, hitting their highest level since May 2002.

Stock market investors also sold heavily, knocking 1.7% off the FTSE 100 in London during early trading. Bourses in other parts of 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,” said Neil Wilson, the 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.

But yields then pushed higher in afternoon trading, back over the 6% mark.

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.

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 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 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.”