Britain’s long-term cost of borrowing has reached its highest level since 1998, as concerns over global inflation and political instability in the US have spooked markets. The interest rate on 30-year UK government bonds hit 5.115% in morning trading, according to financial data provider Refinitiv. This increase comes amid growing worries that central banks will maintain high interest rates through 2024 and possibly into 2025.
The surge in borrowing by governments worldwide during the pandemic, combined with the impact of high energy prices, has led to expectations that heavily indebted countries will face financial struggles. In the US, a surge in government borrowing and political instability following the removal of US House speaker Kevin McCarthy on Tuesday has pushed Treasury yields to a 16-year high. Germany has also faced scrutiny due to reported strains within its ruling coalition, causing its 10-year and 30-year yields to reach their highest levels in 12 years.
Despite the turmoil in bond markets, European stocks remained relatively stable. However, analysts have warned that the combination of high equity valuations and a decrease in appetite for risky assets could result in further declines in the coming weeks. Wall Street is expected to be affected by the bond market sell-off, with S&P 500 futures trading pointing to a 0.5% decrease in share values when trading opens on Wednesday.
Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, emphasized the concerns surrounding high interest rates and the potential for a prolonged sell-off. Streeter stated, “Investors have again been reminded by central bank policymakers in the US that the screws may have to be tightened on monetary policy again, and kept there for some time, to stop inflation whipping higher again.”
The recent spike in US Treasury values has been attributed to stronger-than-expected job vacancy data, indicating a robust economy and suggesting that inflation is unlikely to decrease significantly over the next year. However, business surveys in the UK and eurozone have painted a different picture, with indications of a sharper slowdown. This discrepancy has added to investor uncertainty about the overall global economic outlook.
One consequence of high interest rates on US debt is increased attraction for global investors to buy American assets using dollars, resulting in a higher value for the dollar. As a result, the value of sterling has dropped from over $1.30 to $1.21 in the past two months.
In other economic news, figures released on Wednesday confirmed that the UK’s services sector had its weakest performance since the start of the year. The purchasing managers’ index (PMI) for the industry reported a reading of 49.3, indicating contraction. Although this figure was higher than the initial estimate of 47.2, it still represents the lowest balance since January. Additionally, the PMI survey for the eurozone revealed a significant decline in new orders and a decrease in output across both the manufacturing and service sectors.
The impact of the stronger dollar and higher yields has affected commodity markets, with oil prices experiencing a slowdown. Brent crude oil futures were down 51 cents, or 0.6%, to $90.40 a barrel in early morning trading.
Overall, these developments in global bond markets and economic indicators highlight the concerns surrounding inflation, political instability, and the potential impact on financial markets and economies around the world.
More detail via The Guardian here… ( Image via The Guardian )
