Global bonds are continuing to slide, pushing borrowing costs to multi-decade highs due to a confluence of factors, including the Middle East conflict driving up energy prices and increasing concerns about inflation and ballooning government debt. This sell-off is described as "orderly" by Michael Metcalfe, head of macro strategy at State Street. The rising energy prices are leading traders to anticipate further rate hikes, particularly for short-dated yields. For instance, the yield on 10-year U.S. Treasuries has hit a three-year high and is nearing the 5% level, which could unsettle stock markets, while the 30-year Treasury yields are near 19-year highs despite recent intervention by the U.S. Treasury.
The UK's bond market is particularly sensitive to these developments. The war in the Middle East and its impact on energy prices are the primary drivers of Gilt market swings, overshadowing domestic political concerns. Yields on 30-year Gilts hit their highest in almost 30 years due to fears that continued disruption in the Strait of Hormuz, which handles 20% of global oil supplies, could lead to prolonged high inflation in the UK from rising energy costs. Brent crude prices have increased by approximately 35% since the conflict began on February 27. This heightened sensitivity means the UK is expected to face a greater inflationary shock compared to other countries, potentially prompting more aggressive interest rate hikes from the Bank of England.
Other European bonds are also affected. Germany's 10-year Bund yields are at their highest since 2011, and France's 10-year yield reached its highest level since 2008, signaling concerns that the government's proposed budget might not effectively manage spending. Japan's 10-year yield is above 3% for the first time in 30 years. Nick Ferres of Vantage Point Asset Management noted that higher rates could cause pain for both public and private borrowers and negatively impact stock valuations. The continuous need for governments to borrow more to fund war and increased defense spending, along with potential subsidies to address price pressures, contributes to the demand for higher compensation from investors to hold this new debt.
Analysts like Michiel Tukker, senior UK and eurozone rates strategist at ING, highlight the UK's unique vulnerability, stating that a $10 increase in Brent crude oil prices leads to almost a 30 basis point increase in Bank of England hiking expectations. Guy Winkworth, head of sterling products and euro inflation at Barclays, added that the UK's economy is more susceptible to inflationary shocks due to its history of higher inflation and sensitivity to commodity markets, resulting in larger government yield movements compared to peers. Despite this, some investors are beginning to re-evaluate Gilts; Nedgroup Investments moved from an underweight to a "slightly overweight" position, and UBS Global Wealth Management urged clients to consider rebalancing portfolios towards "quality bonds" like Gilts if energy price outlooks improve and volatility subsides.
