Global bond sell-off widens as UK and French borrowing costs rise

A global sell-off in government bonds intensified on October 1 and broadened in Europe on October 2, driving up long-term borrowing costs in the United Kingdom, France, the United States and Japan. European equities and the euro also fell, while France’s government proposed a budget containing €43bn in cuts and tax increases.¹²

Pressure across major bond markets

The Guardian attributed the market turbulence partly to concern that the US deficit was approaching an unsustainable level and to fears that high oil costs could renew inflation. It reported that conflict in the Middle East was restricting regional oil supplies. Mohit Kumar, an economist at Jefferies, said: “Inflation, deficit and issuance concerns continue to weigh on the bond market.” Those explanations and the assessment of the US deficit are reported by a single source.¹

The yield on the 10-year US Treasury reached a new multi-decade high, according to The New York Times. The Guardian described the level as the highest since 2002 and said US bonds weakened despite inflation data coming in below expectations. Japan’s 10-year government bond yield also moved towards the 30-year high established the previous month.¹²

Investors were holding back from buying bonds while waiting for greater stability, according to the reporting. The latest data reduced expectations that the Federal Reserve would raise rates in October, but the prospect of a December increase continued to weigh on the market. According to IG chief technical analyst Axel Rudolph, stubborn price pressures and rising oil costs may cause interest rates to remain high for an extended period.¹

UK costs and European markets

The Guardian reported that the UK’s 30-year government bond yield reached 6%, which it described as the highest level since 1998; the dossier marks that precise claim as disputed. Yields on five-year and 10-year UK debt also rose, increasing government borrowing costs and adding pressure on John Healey, according to the same source. The rise in yields reduced the government’s room under its fiscal rules.¹

The UK fiscal buffer stood at £23.6bn in March, but some economists estimate that higher borrowing costs may have cut it by half. Economist Jim O’Neill argued that accepting a smaller buffer could be preferable to using tax increases simply to preserve a larger margin. The UK economy expanded at an annual rate of 2% during the first half of the year.¹

The Guardian reported heavy equity selling alongside the bond moves. In early trading, shares in London lost 1.7%, and the main German and French indices—the Dax and CAC 40—were both down 1.1%. The dollar rose to a three-month high as investors remained cautious about inflation and oil prices. These market levels were reported by a single source.¹

France faces widening spread

French borrowing costs increased as sovereign debt selling spread further through Europe on October 2. The yield on France’s 10-year government bond reached its highest point since 2002 before retreating as the sell-off eased. The difference between French and German 10-year borrowing costs widened by 13.9 basis points, its largest one-day increase since March 2020 and its widest level since 2012.¹

France’s public debt has reached a record and stands at 119% of gross domestic product, according to The Guardian. The government’s proposed budget combines €43bn of cuts and tax increases and would reduce the deficit to 5% of GDP next year. ING said the package would keep the deficit from reaching 6.5% but would not stabilise public debt.¹

Concerns over France’s fiscal position helped push the euro down over 0.75% on October 2, with the currency touching €1.1214. Ipek Ozkardeskaya, a senior analyst at Swissquote, said weaker demand for French government debt was affecting both the wider euro area and the single currency. Deutsche Bank strategist Jim Reid compared the latest market stress in Europe with conditions during the eurozone debt crisis.¹