Chancellor John Healey faced a fresh headache yesterday as global borrowing costs soared in a ‘perfect storm’ on the bond markets.
As the oil price spiked higher, yields on 30-year UK bonds, known as gilts, soared above 5.85 per cent, just short of 28-year highs seen earlier this year.
Meanwhile, the Government sold a batch of benchmark ten-year gilts at a yield of up to 5.155 per cent, the highest level since 2007.
That will make the sums harder to add up for the new Chancellor when he delivers his first Budget in October amid growing spending pressures.
Elsewhere, there was some relief for mortgage holders as official figures showing continued UK jobs weakness eased fears of a Bank of England interest rate hike in September.
But the action on bond markets, where yields rise as prices fall, could feed through to higher borrowing costs throughout the economy.
First challenge: Chancellor John Healey (pictured) faces a ‘perfect storm’ on the bond markets as global borrowing costs soar
The latest volatility came as progress on a deal to end the war with Iran stalled.
US President Donald Trump even threatened to bomb American ally Oman if it ‘gets in the way’ of America’s negotiations by trying to reach its own deal with Iran.
That sent oil prices up to $91.89 a barrel – the highest so far this month – and reignited fears that the war will stoke inflation.
It added to the cocktail of worries preoccupying global bond investors, ranging from soaring government debt levels to question marks over the US Federal Reserve under its chairman Kevin Warsh. Bond markets have yet to recover after taking a hit when the Iran war began at the end of February.
Experts also pointed to a surge in debt issuance by AI firms to fund their huge expansion plans, which is competing for bond investors’ money.
Yesterday’s sell-off saw yields on 30-year US Treasuries hit their highest level since 2007 at more than 5.33 per cent, while in Japan ten-year borrowing costs hit a three-decade high of just under 3 per cent.
In Germany, the 30-year Bund yield topped 3.78 per cent, the highest since 2011, while the French equivalent, at 4.91 per cent, was the highest since 2008.
UK borrowing costs remain the highest among the G7 group of advanced economies and have shown little sign of improvement since Andy Burnham became Prime Minister a month ago.
Markets are jittery over his high-spending plans, which include a major council-house building programme, an overhaul of social care and a boost to the defence budget.
Healey faces a tricky task in paying for Burnham’s initiatives, prompting fears that he may impose further punishing tax rises or borrow even more.
His task is made harder when rising gilt yields increase the cost of borrowing.
Axel Rudolph, chief technical analyst at trading platform IG, said: ‘Bond markets are facing a perfect storm as inflation worries, rising oil prices, heavy government borrowing and a surge in AI-related debt issuance push long-term yields to multi-decade highs across major economies.’
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