UK bond yields at 25 year high: Global borrowing costs rocket in debt market rout
Britain’s long-term borrowing costs surged to a 25-year high yesterday amid global market turmoil.
The yield paid on 30-year UK bonds hit 5.115 per cent, passing the level of a year ago in the wake of Liz Truss’s disastrous mini-Budget.
It came as Bank of England Governor Andrew Bailey sounded a warning about the possibility of ‘further large shocks’ to the UK economy.
Meanwhile, latest data from a closely-watched business survey did little to diminish the gloom, pointing to a further downturn in private sector activity last month.
Government bonds – known in the UK as gilts – are parcels of debt sold to investors to raise cash for the Treasury. Yields are the returns demanded by investors for lending to the Government.
On the up: Bond yields are rising across the world as markets react to the possibility of interest rates staying higher for longer
When bond prices fall, yields go up. Bond yields are rising across 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 figures showing higher than expected job vacancies, adding to the chances of interest rates going up again.
Yields on 30-year US bonds rose to 5 per cent for the first time since 2007 yesterday and German ten-year yields were also up sharply, to a 12-year high of 3 per cent.
In Britain, the bond turmoil poses a headache for Chancellor Jeremy Hunt, already faced with a colossal £2.59trillion debt mountain, representing 99 per cent of GDP.
The debt is repaid over different timescales and the most eye-catching move in the UK was in 30-year gilt yields, though these dropped off by the end of yesterday.
Ten-year yields climbed as high as 4.67 per cent while the five-year rate touched 4.71 per cent and two-year yields reached 5.06 per cent before the market took a breather.
Bond market turmoil can pull down share prices and drive up the cost of borrowing.
The FTSE 100 lost 0.8 per cent yesterday while the FTSE 250 fell 1.1 per cent.
However, the market moves have not sparked the panic seen after the mini-Budget, when the mayhem was far worse because of the alarming speed of the sell-off.
Russ Mould, investment director at AJ Bell, said: ‘It feels gloomy with a “higher rates for longer” assumption helping to sour sentiment. Inflation is clearly a concern, but also Government debt.’
Comments from the Bank of England Governor failed to lift the gloom. While the Bank has paused its interest rates rises after 14 hikes in a row, Bailey said ‘the job is not done’ on inflation.
And in a separate interview with Prospect magazine he warned that crises buffeting the global economy may be far from over.
‘We have seen these shocks and I think we have to be prepared for whatever comes next,’ he said. ‘There could be further large shocks we don’t know about.’
Some voices argue that by sticking to targets of bringing inflation back down to 2 per cent – by jacking up rates – central banks make things worse. A report by the UN Conference on Trade and Development cut global growth forecasts.
Richard Kozul-Wright, director of its globalisation and development strategies division, warned: ‘Pushing down on the fiscal brakes and keeping interest rates high is the wrong policy combination for steadying the global economy.’
In the UK, the monthly purchasing managers’ index was 48.5 for September – its lowest since January, on a scale where 50 separates growth from contraction.
That signalled that the economy continued to shrink. The eurozone also clocked up another contraction, with demand falling at the fastest pace for three years.
