UK bond yields hit 6% as global debt selloff widens again

UK bond yields reached 6% on 30-year debt for the first time since 1998, lifting pressure on government finances before this month's budget.

The move came during heavy trading on Thursday and widened a global selloff in longer-dated government bonds. Yields on five-year and 10-year gilts also rose, increasing the rate investors demand to hold UK government debt.

Thirty-year gilts hit 6%

Higher gilt yields feed directly into the government's financing costs when new debt is sold or existing debt is refinanced. The rise adds a constraint for the Treasury before the budget later this month, when spending, tax and borrowing plans will be judged against more expensive market funding.

Equity markets also weakened after the bond move. London's main stock market fell 1.7% in early trading, while Germany's Dax and France's CAC 40 each dropped 1.1%, according to the market levels cited in the source material.

Neil Wilson, UK investor strategist at Saxo, linked the equity decline to the bond market move. "There is carnage in the bond market which is hitting stocks hard," he said, adding that the rout appeared to be pushing investors toward safer positions.

Oil risk meets deficit anxiety

Investors cited two overlapping pressures: concern that higher oil costs could keep inflation elevated, and unease over the scale of debt issuance needed to finance government deficits. The Middle East conflict has continued to restrict oil supplies from the region, according to the source material, keeping energy prices central to rate expectations.

The selloff was not confined to the UK. US 10-year Treasury yields reached their highest level since 2002 on Wednesday, while Japan's 10-year yield moved toward the 30-year high it set last month.

The US bond move followed inflation data that came in below forecasts on Wednesday, a release that would ordinarily reduce pressure for tighter monetary policy. Traders remained focused instead on the strength of the US economy and the possibility that wage growth could keep inflation above central bank targets.

Mohit Kumar, an economist at Jefferies, said investors were weighing both inflation and supply pressures in the bond market. "Inflation, deficit and issuance concerns continue to weigh on the bond market," he said.

Fed path keeps markets tense

Kumar also pointed to weaker demand from investors after the latest selloff. He said hedge funds had taken losses and lacked appetite to oppose the move, while longer-term investors were more likely to wait for signs of stability before buying.

Axel Rudolph, chief technical analyst at IG, said the latest data had reduced expectations for an October rate increase by the US Federal Reserve. He said investors remained cautious that persistent inflation and higher oil prices could keep rates elevated for longer, while the dollar had climbed to a three-month high.

The first path for markets depends on oil and inflation expectations. If energy costs continue to feed inflation forecasts, central banks may keep policy tighter for longer; that would weigh on global growth, raise UK debt-service pressure and keep rate-sensitive sectors such as housing, banks and utilities under strain.

The second path turns on whether incoming data persuade investors that inflation is cooling without a renewed wage or oil shock. If that holds, yields could stabilize, easing the immediate pressure on the UK budget and giving equity markets room to recover some of Thursday's losses.

The main open question is whether buyers return to long-dated government bonds before the next major central bank decisions. Until demand improves, governments issuing debt will face a higher hurdle, and companies whose valuations depend on lower long-term rates will remain exposed to further yield moves.