The global bond sell-off intensified on Thursday, driving 10-year US government borrowing costs to their highest level in 24 years in a frantic day’s trading.
The threat of a renewed round of inflation from the persistently high cost of oil has spooked investors on both sides of the Atlantic, with central banks expected to raise interest rates in the coming months to prevent price increases from becoming embedded.
The sell-off drove the yield, or interest rate, on 10-year US Treasuries to 5.34% – the highest level since 2002.
In the UK, where surging borrowing costs are increasing the pressure on the chancellor, John Healey, before his first budget later this month, the yield on 30-year bonds hit 6% for the first time since 1998, before easing slightly later in the day. Yields on five- and 10-year UK bonds were also up.
Stock market investors sold heavily too, knocking almost 1.7% off the FTSE 100 in London – its worst daily fall since May. Bourses in other parts of Europe were also hit, with Germany’s DAX falling 1% and France’s CAC 40 losing 1.6%.
“There is carnage in the bond market, which is hitting stocks hard,” said Neil Wilson, the investor strategist at Saxo UK. “It looks like the relentless rout in the bond market is sending investors running for cover.”
The bond sell-off around the world is being driven by fears of high inflation, as the Middle East conflict continues to restrict oil supplies from the region.
Japan’s 10-year yield rose towards the 30-year high set last month.
US bonds weakened despite inflation data on Wednesday coming in lower than forecast, which was expected to calm investors’ nerves about the prospect of further increases in the cost of borrowing by the US Federal Reserve.
Traders remain anxious that the Fed will continue to raise interest rates to fight inflation, mainly in response to the strength of the US economy and the prospect of workers bidding up their wages.
Mohit Kumar, an economist at Jefferies, said there was growing concern at the amount of debt being issued to fund government deficits, as well as inflation concerns.
“Inflation, deficit and issuance concerns continue to weigh on the bond market,” he said.
“There is also a buyers’ strike as investors do not want to step in till we get some form of stability. Hedge funds have suffered in the latest round of sell-off and do not have the risk appetite to fade the move. Real money potentially has the risk appetite, but won’t step in till we get some stability.”
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Axel Rudolph, the chief technical analyst at the investing and trading platform IG, said: “While the latest data has reduced expectations of an October Fed rate hike, investors remain wary that persistent inflation and higher oil prices could keep rates elevated for longer.
“The dollar is benefiting from that caution, climbing to a three-month high, while the prospect of a December rate increase keeps pressure on bond markets.”
Oil prices rose again on Thursday, despite analysis that showed exports of crude from the strait of Hormuz have largely returned to levels seen before the outbreak of the Iran war, as oil producers and the shipping industry have found alternative ways of transporting crucial fuel out of the Middle East.
Brent crude rose 3% to about $101 a barrel.
The price of crude remained at elevated levels as traders balanced the recovery in some Middle East exports with uncertainty over a long-term solution to the conflict and reopening of the strait.
Eurozone countries were also caught up in the wave of selling, with France in particular in investors’ sights. Ten-year yields on French government bonds hit 4.96%, the highest level since 2002.
The spread over German yields – an indicator of the additional risk France is believed to face – has jumped to its highest level in more than a decade.
