Global Bond Markets Shudder as US Borrowing Costs Hit 24-Year High

A wave of selling swept through global bond markets on Thursday, pushing US government borrowing costs to their highest level in nearly a quarter of a century and reviving uncomfortable questions about whether the world’s largest economies can keep financing their debts without triggering a fresh inflation scare.

The yield on 10-year US Treasuries — effectively the interest rate the government pays to borrow money over that period — jumped to 5.34%, a level not seen since 2002. The move rippled across the Atlantic, where UK 30-year bond yields briefly broke above 6% for the first time since 1998, a milestone that will add fresh strain on Chancellor John Healey as he prepares his first budget later this month.

For ordinary households and businesses, rising government bond yields are far from an abstract concern. They tend to feed directly into the cost of mortgages, business loans and government debt interest payments, meaning the latest sell-off could translate into higher borrowing costs across the economy just as policymakers had hoped for some relief.

The source of the unease is a familiar one: oil. Persistently high crude prices, driven by the continuing conflict in the Middle East, have stoked fears that inflation — which many investors had assumed was being brought under control — could come roaring back. Brent crude rose a further 3% on Thursday to around $101 a barrel, even as analysts noted that oil exports through the strait of Hormuz have largely recovered to pre-conflict levels as shippers find workarounds. The lingering uncertainty over a lasting resolution to the conflict, rather than the immediate supply numbers, appears to be what is rattling markets.

Stock markets took the bond rout as a cue to retreat as well. London’s FTSE 100 shed almost 1.7% in its worst single-day fall since May, while Germany’s DAX dropped 1% and France’s CAC 40 fell 1.6%. Eurozone bonds were swept up in the selling too, with France drawing particular scrutiny from investors wary of the country’s fiscal position.

What makes this episode notable is that it came despite US inflation data released on Wednesday that actually came in softer than expected — numbers that, in calmer times, might have reassured markets that the Federal Reserve was done raising rates. Instead, traders shrugged off the good news, apparently unconvinced that lower headline inflation will hold if oil prices keep climbing and wages continue to rise in a resilient US labour market.

“There is carnage in the bond market, which is hitting stocks hard,” said Neil Wilson, investor strategist at Saxo UK, describing a “relentless rout” that is sending investors scrambling for safety.

Beyond the immediate inflation worry, analysts point to a deeper structural anxiety: the sheer volume of government debt being issued to plug widening budget deficits. Mohit Kumar, an economist at Jefferies, said markets are grappling simultaneously with concerns over inflation, deficits and the pace of bond issuance. He described what amounts to a “buyers’ strike,” with hedge funds nursing recent losses and lacking the appetite to bet against the sell-off, while larger institutional investors — so-called “real money” — are waiting on the sidelines for signs of stability before stepping back in.

That combination of nervous hedge funds and cautious long-term investors helps explain why the sell-off has proven so self-reinforcing: with few buyers willing to absorb new debt at current prices, yields have had to rise further to attract demand, which in turn unsettles markets even more.

The dollar, meanwhile, has been one of the few beneficiaries of the turmoil, climbing to a three-month high as investors sought refuge in the world’s reserve currency. Axel Rudolph, chief technical analyst at IG, said that while the softer US inflation data had dimmed expectations of an October Fed rate rise, investors remain braced for the possibility of a hike in December if oil prices stay elevated.

Japan has not been immune either, with its 10-year yield climbing back toward the 30-year high it set just last month — a reminder that this is a genuinely global phenomenon rather than a problem confined to Washington or London.

For governments already wrestling with stretched public finances, the timing could hardly be worse. Higher borrowing costs mean more of every tax pound or dollar goes toward servicing existing debt rather than public services, adding pressure on finance ministers everywhere — not least Healey, who must now craft a budget against a backdrop of the most expensive long-term borrowing Britain has faced in nearly three decades.

Whether this proves a temporary spasm or the start of a more sustained repricing of risk may hinge on developments far from any trading floor — chiefly, how the Middle East conflict and its effect on oil supplies evolve in the weeks ahead. Until then, bond markets look set to remain on edge.