The yield on 10-year UK government bonds soared to as high as 4.821%, the highest level since August 2008. This rise signifies one of the most serious challenges the UK bond market has faced since the global financial crisisFurthermore, the yield on 30-year bonds reached a staggering 5.383%, marking its highest point since August 1998, signaling a major shift in long-term investor confidence towards UK bonds.
In addition, the yield on 2-year UK government bonds rose to its highest level since February 2024, now standing at 4.576%, while the 5-year yield also hit a peak since October 2024, at 4.573%, with both yields increasing by over 10 basis points during the day.
The British pound also suffered a significant drop in the foreign exchange market, falling over 1.2% against the U.Sdollar to reach its lowest point since April of the previous year.
The concerns surrounding inflation are palpable, leading to multiple downward pressures on UK bonds
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Since September, amid increasing worries about inflation risks, UK government bond yields have consistently climbed.
The financial markets currently forecast that the Bank of England will only reduce interest rates twice before the end of the year, a decrease from four anticipated cuts the previous monthExpectations are that the Bank of England will lower interest rates from the current level of 4.75% to 4.25%, yet this still reflects historic highs.
Additionally, wage growth and rising service prices are continuously inflating the future inflation outlookWhile increased wages may reflect a tighter labor market to some degree, they also raise production costs for businessesCompanies often pass these costs onto consumers through higher prices for goods and services, thereby exacerbating inflationary pressures.
president has stirred significant controversy across the globeIncreasing tariffs can heighten inflation risks internationally, as the added costs of imported goods compel companies to raise their prices to preserve profit margins, thus elevating overall price levelsWithin the framework of a highly interdependent global economy, the UK, being a highly open economy, is unable to remain insulated from this external inflationary pressure, which further disrupts the domestic economic order as well as financial market stability.
While there is a prevailing sentiment in the market that UK bonds will continue to weaken, the recent depreciation of the pound may only be a temporary phenomenonMichiel Tukker, a senior European rates strategist at ING, notes that:
“Sticky inflation, fiscal spending, rising U.Srates, and pressures from increasing bond supplies will exert continuous upward pressure on the pound