The global government bond sell-off picked up speed on Wednesday, pushing up borrowing costs across major markets and adding pressure to UK Chancellor John Healey ahead of his first budget.
Yields on 10-year UK gilts rose to just below 5.3% in early trading, the highest level since mid-2008. The selloff has been driven by mounting investor concerns about inflation and widening fiscal deficits around the world.
Inflation expectations have intensified since the US and Iran resumed exchanging fire over the weekend, sending oil prices higher and increasing the likelihood that central banks will need to raise interest rates in coming months. The Brent crude benchmark hovered near $95 a barrel as fighting continued in the Middle East. US airstrikes targeted Iranian positions overnight, prompting counterstrikes by Tehran against American interests in Gulf allies.
Higher bond yields raise the cost of financing government debt. Chris Beauchamp, chief market analyst at IG, said governments worldwide are feeling the pressure from bond markets but noted the situation is "particularly acute for the UK," where borrowing costs are climbing rapidly.
UK analysts warned that the rise in gilt yields since the start of the Iran conflict has potentially erased nearly half of Healey's fiscal headroom. Economists at Deutsche Bank estimated that the £26bn margin for maneuver created by Chancellor Rachel Reeves at her spring forecast could shrink to less than £14bn by the time of the 28 October budget. Healey may face a choice between raising taxes or cutting spending to rebuild fiscal space, while also coming under pressure to fund higher defence spending.
Asian equity markets fell sharply ahead of the UK sell-off. The Nikkei 225 slumped 2.85%, China's CSI 300 dropped 1.4%, and South Korea's Kospi fell 3.3%.
Investors have also been rattled by recent attempts by the US administration to influence financial markets, including efforts to help prop up the Japanese yen and purchases of US Treasury bonds aimed at curbing rising yields. Neither intervention appears to have succeeded.
