UK bond yields at 25 year high: Global borrowing costs rocket in debt market rout
UK bond yields at 25-year high as global borrowing costs soar due to debt market crisis
UK long-term borrowing costs rose to a 25-year high yesterday amid turmoil in global markets.
The yield on 30-year British bonds reached 5.115 percent, surpassing levels a year ago, in the wake of Liz Truss’s disastrous mini-Budget.
It came as Andrew Bailey, governor of the Bank of England, warned of the possibility of ‘further major shocks’ to the British economy.
Meanwhile, the latest data from a closely watched business survey failed to lift the gloom, pointing to a further decline in private sector activity last month.
Government bonds – known as gilts in Britain – are bundles of debt sold to investors to raise money for the Treasury. Yields are the returns that investors demand for loans to the government.
On the bright side, bond yields are rising around the world as markets react to the possibility of interest rates staying higher for longer
When bond prices fall, yields rise. Bond yields are rising around the world as markets react to the possibility of interest rates staying higher for longer.
The latest sell-off began this week in the US, with data showing higher-than-expected vacancies, raising the likelihood that rates will rise again.
Yields on US 30-year government bonds rose yesterday to 5 percent for the first time since 2007, and German 10-year yields also rose sharply to a 12-year high of 3 percent.
In Britain, the bond turmoil is causing headaches for Chancellor Jeremy Hunt, who is already facing a colossal £2.59 trillion debt mountain, representing 99 percent of GDP.
The debt is being repaid over different installments and the most notable move in Britain has been the rise in 30-year government bond yields, although these fell late yesterday.
The 10-year yield rose to 4.67 percent, while the five-year yield reached 4.71 percent and the two-year yield reached 5.06 percent before the market took a breather.
The bond market turmoil could drive down stock prices and drive up borrowing costs.
The FTSE 100 lost 0.8 percent yesterday, while the FTSE 250 fell 1.1 percent.
However, the market movements have not caused the panic we saw after the mini-Budget, when the chaos was much worse due to the alarming speed of the sell-off.
Russ Mould, investment director at AJ Bell, said: ‘It feels bleak as the assumption of ‘higher interest rates for longer’ sours sentiment. Inflation is clearly a concern, but so is the national debt.’
Comments from the Governor of the Bank of England did little to dispel the gloom. While the Bank has halted rate hikes after 14 hikes in a row, Bailey said “the job is not done yet” on inflation.
And in a separate interview with Prospect magazine, he warned that the crises plaguing the global economy may be far from over.
“We have seen these shocks and I think we have to be prepared for what comes next,” he said. “There could be other major shocks that we don’t know about.”
Some voices argue that central banks are making matters worse by sticking to the targets of bringing inflation back to 2 percent – by raising interest rates. A report from the UN Conference on Trade and Development lowered global growth forecasts.
Richard Kozul-Wright, director of the Globalization and Development Strategies Division, warned: “Reducing fiscal brakes and keeping interest rates high is the wrong policy combination to stabilize the global economy.”
In Britain, the monthly purchasing managers’ index for September was 48.5, the lowest since January, on a scale where 50 separates growth from contraction.
That meant the economy continued to shrink. The eurozone also recorded another contraction, with demand falling at the fastest pace in three years.