Britain’s long-term cost of borrowing has hit its highest level since 1998, as political instability in the US and fears of sustained high levels of inflation triggered a sell-off in global bond markets.
The yield, or interest rate, on 30-year UK government bonds hit 5.115% in morning trading, according to the financial data provider Refinitiv.
The rise, which takes the UK’s borrowing costs above the level seen a year ago in the crisis after Liz Truss’s mini-budget, follows growing concerns that central banks will keep interest rates at the high levels through 2024 and possibly into 2025.
With most governments borrowing huge sums throughout the coronavirus pandemic and to cushion the blow over the last year from high energy prices, traders expect countries with high levels of debt to struggle financially.
An increase in US government borrowing and political instability after the removal of the US House speaker Kevin McCarthy on Tuesday pushed Treasury yields to a 16-year high.
Germany has also found itself in traders’ sight lines amid reports of strains within its ruling coalition, pushing the 10-year German yield to its highest level in 12 years. The interest rate on the country’s benchmark 10-year debt rose above 3% for the first time since 2011, while its 30-year yield also hit a 12-year high.
European stocks, which have tracked downwards over the last two months, remained calm despite the rout in bond markets but analysts warned that equity valuations and souring appetites for risky assets meant further falls were likely over the coming weeks.
The pain is likely to spread to Wall Street when trading opens on Wednesday, after S&P 500 futures trading pointed to a 0.5% fall in share values.
Susannah Streeter, the head of money and markets at the investment platform Hargreaves Lansdown, said: “Chill winds of worry are swirling about high interest rates settling in and there is set to be little respite from the sell-off.
“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.”
Stronger-than-expected job vacancy data was cited as one reason for the recent rise in US Treasury values, indicating that the economy remained robust and inflation was unlikely to fall far over the next year. However, business surveys covering the UK and eurozone have indicated a sharper slowdown, confusing the overall global picture.
Streeter said the US jobs data “has added to worries about labour market tightness, and led to expectations that not only will there be another interest rate hike, to try to dampen down demand in the economy, but that any prospect for rate cuts has been pushed further into the distance”.
One of the spin-off effects of high interest rates on US debt is the attraction for global investors to buy American assets with dollars, sending the value of the dollar higher. Sterling has dropped from more than $1.30 to $1.21 in the last two months in response to the greenback’s rise.
On Wednesday, figures confirmed the UK’s services sector had its weakest performance last month since the start of the year. The purchasing managers’ index (PMI) reported a reading for the industry of 49.3, where a figure below 50 indicates contraction. This was above an earlier initial estimate of 47.2 but was still the lowest balance since January.
Meanwhile, the PMI survey for the eurozone revealed that new orders at companies in the bloc fell at the fastest rate in almost three years, while output fell across the manufacturing and service sectors.
In commodity markets, the stronger dollar has helped put the brakes on oil prices, and higher yields have weighed on gold.
Brent crude oil futures were down 51 cents, or 0.6%, to $90.40 a barrel in early morning trading.