The cost of government bonds reached its highest level in 15 years due to the bond market turmoil
The cost of government bonds reached its highest level in 15 years due to the bond market turmoil
The UK government’s borrowing costs hit a 15-year high amid concerns that interest rates will remain painfully high well into next year to curb inflation.
In a day of turmoil in global bond markets, ten-year government bond yields hit 4.75 percent for the first time since the outbreak of the 2008 financial crisis as investors bet interest rates will be 6 percent or higher for most of 2024 , spelling misery for millions of businesses and households with mortgages.
The prospect of ‘longer’ interest rates also terrified investors in the US, where ten-year equivalent yields spiked to within a fraction of their 16-year high.
It was long hoped that rate hikes would be followed by rate cuts, but it is now feared that a prolonged period of pain will be needed to bring inflation back under control, sending the economy into recession.
Michael Hewson, an analyst at CMC Market, said: “It’s now less about how many hikes are coming and more about how long we could see interest rates at these levels.”
Inflation battle: Investors are betting the Bank of England will be forced to keep interest rates at 6% or higher for much of 2024
Official figures this week showed inflation in the UK fell to 6.8 per cent in July – down from 7.9 per cent in June and peaking at 11.1 per cent in October.
But it remains well above the 2 percent target and with wages rising at the fastest rate ever, investors are betting rates will reach 6 percent this year and possibly 6.25 percent next year.
According to the financial markets, rates will remain above 6 percent until the second half of next year in a nightmare ‘longer higher’ scenario.
Since December 2021, the rates have already been increased from 0.1 percent to 5.25 percent.
In the US, interest rates were hoped to be at or near their peak and soon to be cut to avoid the possibility of a recession.
But in a sign that Federal Reserve officials remain tense, the US central bank used an update on Wednesday to warn of “significant upside risks” to inflation.
Samy Chaar, chief economist at Lombard Odier, said that instead of pricing in higher US rates, “what’s happening here is the market is pricing out austerity, or at least putting it off until later.”
A report from investment firm Oaktree Capital said, “Recession or no recession, we think the likelihood of long-term higher interest rates is far greater than the likelihood of short-term cuts.”