A global bond sell-off has seen UK gilt yields hit 6% for the first time in nearly 30 years, heaping pressure on the Chancellor ahead of his inaugural Budget later this month.
The yield on UK Government bonds, also known as gilts, reached 6.07% in morning trading on Thursday – the highest level since 1998, with the worldwide bond market woes spilling over into equities as London’s FTSE 100 Index tumbled by 2%.
Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.
Rising yields on these bonds mean it costs more for governments to borrow from financial markets.
It intensifies the challenge facing Chancellor John Healey as he looks to set out his first Budget at a time of pressure on Britain’s creaking public finances and rising debt pile.
Axel Rudolph, chief technical analyst at IG, said: “Higher yields mean the Government has to pay more to finance its debt, putting further pressure on the public finances and making it harder to balance spending commitments with the need to keep borrowing under control.
“Even the recent fall in oil prices hasn’t provided any lasting relief for bond markets.
“With yields still rising, the Chancellor faces an increasingly narrow path as he prepares to set out his plans for the economy.”
The FTSE 100 Index shed 209 points to stand at 10397.1 just over an hour after market opening.
Markets were also tumbling across Europe, with the Dax in Germany and France’s Cac 40 both off 1.3%.
This came despite Brent crude prices falling back below 100 US dollars a barrel, down 2% at 99.9 dollars, on signs that Middle East crude flows are back to pre-Iran war levels.
Neil Wilson, Saxo UK investor strategist, said the “relentless rout in the bond market is sending investors running for cover”.
Government bonds were also slumping across the globe, with the US 10 year bond yield at its highest since 2002.
Susannah Streeter, chief investment strategist at Wealth Club, said: “The blue-chip index has taken a dive in early trade, with confidence hit by concerns about the potential for higher inflation, more refinancing costs and the knock-on effect on spending.
She added: “With debt already high and interest payments eating up a hefty chunk of public finances, sustained yields at these levels could further squeeze the Chancellor’s wiggle room when he sets out his spending plans.”
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