Renewed UK bond selling bounces off global markets

UK bonds sold off sharply on Tuesday in a third day of turbulent trading, a move that rebounded on global markets and dragged US and European sovereign debt sharply lower.

The benchmark 10-year gilt rose 0.26 percentage points to 4.5 percent on Tuesday, a new 14-year high, after Bank of England chief economist Huw Pill said on Tuesday that the easing announced last week was over fiscal policy “would require a substantial increase in monetary response.”

Sterling and UK government bonds have sold off sharply since the UK Chancellor of the Exchequer, Kwasi Kwarteng, announced £45bn of unfunded tax cuts on Friday. The pound hit an all-time low against the dollar on Monday and gilts across all maturities sold off.

The magnitude of the UK selling has also added to the tremors in global markets, which have already been rocked by concerns about global interest rate hikes. The US S&P 500 shed gains of up to 1.7 percent on Tuesday and was down 0.5 percent by midday. The drop left the benchmark US stock barometer at its lowest level since November 2020 on an intraday basis.

European stocks closed at daily lows as bonds started to sell off. The regional Stoxx Europe 600 ended the day down 0.1 percent.

Long-term debt saw the biggest moves on Tuesday, with the 30-year gilt yield rising as much as 0.51 percentage point to 5.04 percent, its highest level since 2002.

The rise in long-dated bonds suggests investors are “now concerned that the BoE may not be acting fast enough to control inflation,” said Deutsche Bank strategist Jim Reid. He added that investors were also concerned that more debt would hit the market, with a 30-year deal expected to close later this week.

Line chart of 30-year Gilt Yield (%) showing the increase in long-term borrowing costs in the UK

The move in the UK has been reflected in global markets, with German and Italian bonds falling sharply, as well as a significant, albeit more muted, move in the US.

The global reaction is partly due to fears of heightened economic uncertainty over the UK’s new budget plan, according to some analysts. The tax package and subsequent market reaction have increased the chances of a global recession, Atlanta Federal Reserve Chairman Raphael Bostic argued Monday.

The German 10-year Bund yield, which is the benchmark for the cost of borrowing in the EU, rose 0.15 percentage points to 2.25 percent, the highest since 2011. Italian bond yields rose for the second straight day after a far-right Coalition politicians have won the elections in Italy. The yield on Rome’s 10-year bond rose to 4.7 percent, the highest since 2013.

The spread between Italian and German 10-year yields, a measure of financial risk in the region, hit 2.54 percentage points, the highest level since 2020. The widening spread underscores investors’ nervousness about the election success of far-right parties in Italy and their elections willingness to adhere to EU rules.

In the US, longer-dated Treasuries fell and the 10-year yield, the benchmark for the global cost of borrowing, rose to 3.97% and was on the verge of breaking the key 4% mark. Renewed UK bond selling bounces off global markets

Adam Bradshaw

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