Bond yields surge to 15-year high as rate-hike fears mount
Bond yields rise to 15-year high as financial markets bet interest rates will rise to 6.5% next year
UK bond yields rose to a 15-year high and the FTSE 100 tumbled yesterday as financial markets bet that rates will rise to 6.5% next year.
The yield on ten-year benchmark bonds, the rate investors are asking for loans to the government during that period, exceeded 4.7 percent, surpassing the level of market turmoil following Liz Truss’s mini-budget last fall .
And the FTSE 100 fell 161.60 points, or 2.2 percent, to 7280.50, reaching its lowest level in more than three months. It was the biggest one-day drop since March.
The second-tier FTSE 250 fell 2.6 percent, or 476.87 points, to 17,916.46.
It was part of a turbulent global response to fears of rising interest rates. And the rise in bond yields adds to evidence that pressure on government balance sheets is being driven by rising interest rate expectations.
Highest in 15 years: Ten-year benchmark bond yields topped 4.7%, surpassing the level of market turmoil following Liz Truss’ mini-budget last fall
A day earlier, the UK Treasury sold £4bn of two-year bonds to investors at its highest price since 2007.
If interest rates in the UK were 6.5 per cent – up from 5 per cent today – they would be at their highest point since 1998, exacerbating the misery for borrowers who have already seen mortgage rates rise sharply.
Markets yesterday even bet on a more than 40 percent chance of a price of 6.75 percent next year.
More than two million borrowers whose cheaper rate deals expire in the next 18 months are already facing hundreds of pounds added to their bills.
The prospect of the crisis getting worse is fueling further pessimism about the risk of a ‘hard landing’ – the possibility that the Bank of England will have to raise interest rates enough to trigger a recession.
“Investor expectations for future BoE hikes have only become more aggressive in recent days,” Deutsche Bank strategists wrote in a note to clients.
JP Morgan economist Allan Monks suggested in a recent note that there is a risk they will need to rise to 7 percent to control stubbornly high inflation.
Yesterday’s global turmoil came after the minutes of last month’s US Federal Reserve meeting were released on Wednesday.
They showed that while the Fed left rates unchanged for now, most central bank officials expected them to rise again.
Further jitters followed yesterday when a survey last month pointed to a much stronger-than-expected job market in the US.
It seems unlikely that the Fed will cut interest rates until there are signs of a deterioration in employment.
On Wall Street, the Dow Jones was down 1 percent and the S&P 500 and Nasdaq 0.8 percent. In Europe, the German Dax fell by 2.6 percent and the French Cac 40 by 3.1 percent.
German two-year bond yields reached their highest level in 15 years.
Yields on US bonds also rose.