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Renewed selling in UK bonds ricochets across global markets

UK bonds sold off strongly on Tuesday on a third day of turbulent trading, a move that ricocheted across global markets and pulled US and European government debt sharply lower.

The benchmark 10-year gilt on Tuesday rose 0.26 percentage points to hit 4.5 per cent, a fresh 14-year high, after the Bank of England’s chief economist Huw Pill said the loosening of fiscal policy announced last week would “require a significant monetary response.”

The pound and UK government debt have sold off sharply since UK chancellor of the exchequer Kwasi Kwarteng announced £45bn worth of unfunded tax cuts on Friday. The pound on Monday reached an all-time low against the dollar, and gilts across maturities sold off.

The magnitude of the selling in the UK has also intensified tremors across global markets, which have already been shaken by concerns about global interest rates rises. The US S&P 500 on Tuesday shed gains of as much as 1.7 per cent and was down 0.5 per cent by lunchtime. The fall left the benchmark US equities barometer at its lowest level on an intraday basis since November 2020.

European equities closed at their lows of the day as bonds began selling. The region-wide Stoxx Europe 600 ended the day down 0.1 per cent.

The biggest moves on Tuesday were among long-dated debt, with the 30-year gilt yield rising as much as 0.51 percentage points to 5.04 per cent, its highest level since 2002.

The rise in long-term bonds suggests investors are “now worried that the BoE may not be acting quickly enough to control inflation”, said Jim Reid, a strategist at Deutsche Bank. He added that investors were also concerned about more debt coming into the market, with a 30-year deal expected to take place later this week.

Line chart of 30-year gilt yield  (%) showing UK long-term borrowing costs surge

The moves in the UK have reverberated across global markets, with German and Italian bonds falling sharply, as well as a significant, though more muted, move in the US.

The global reaction is in part due to fears of heightened economic uncertainty because of the UK’s new fiscal plan, according to some analysts. The tax package and ensuing market reaction had increased the chances of a global recession, argued Atlanta Federal Reserve president Raphael Bostic on Monday.

The German 10-year Bund yield, which is the benchmark for borrowing costs in the EU, rose 0.15 percentage points to 2.25 per cent, its highest level since 2011. Italian bond yields rose for the second consecutive day after a coalition of far-right politicians won Italy’s elections. The yield on Rome’s 10-year bonds rose as high as 4.7 per cent, its most elevated level since 2013.

The difference between Italian and German 10-year yields, a measure of financial risk in the region, hit 2.54 percentage points, the highest level since 2020. The widening difference underscores investor jitters about the success of far-right parties in Italy’s elections and their willingness to stick to EU rules.

In the US, longer-term Treasuries declined, with the 10-year yield, the benchmark for borrowing costs worldwide, rising to 3.97 per cent, close to breaking through the key 4 per cent level.

Read More: Renewed selling in UK bonds ricochets across global markets

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