Karishma Vanjani
An overnight selloff in U.K. government debt has underscored the scope of a broad selloff in global bond markets. The damage could deepen, especially because the U.S. Treasury market remains in a tough spot.
The yield on the U.K. 10-year gilt, a benchmark British bond, rose to 4.82% on Thursday, its highest level since it reached 4.83% in August 2008. The 30-year yield is at its highest since 1998.
Higher yields signal that bond investors see increased risks. They raise borrowing costs for governments and companies, which tends to eventually hit stocks in the country issuing the debt.
The U.K. is the latest and worst casualty of a global rout that has been spurred by climbing yields on U.S. Treasury debt . The yield on 10-year Japanese government bonds soared to a 13-year high on Wednesday, while German 10-year bund yields were trading near their highest levels in six months on Thursday.
The U.K. is the only developed country where long-term yields are at their highest levels since the 2008-2009 financial crisis, according to Capital Economics. It cited data from financial markets data provider LSEG Data & Analytics, looking at Australia, Sweden, Germany, Norway, New Zealand, the U.S., and Canada.
Trouble in U.K. bonds has been brewing since early December, lifting yields on 10- and 30-year gilts by more than 0.6 percentage point. But the U.S. bond market has pushed it over the edge. The 10-year Treasury yield hit its highest level since April this week even though the Federal Reserve has cut short-term interest rates by a full percentage point since September.
"All gilts are doing is mirroring US treasuries," Deutsche Bank's George Saravelos argued on Thursday. "When global uncertainty (and especially US Treasury yields) go up, as is currently happening ahead of the incoming Trump administration, a small open economy with large foreign financing needs naturally becomes more vulnerable," he added.
The gap in yields between 10-year Treasury debt and 10-year gilts shows how British debt has been following moves in the U.S. bond market. Yields were more or less the same on Monday, while on Thursday, the gilt yield ended 0.140 percentage point higher.
The factors behind the rise in U.S. Treasury yields include higher supplies of fixed-income securities. The U.S. government is issuing large amounts of notes and bonds, while as of Wednesday, corporations had sold $83.4 billion in debt so far this year, according to LSEG data. It was the highest year-to-date figure since 1990.
The corporate debt competes for capital, weighing on prices for Treasury debt and driving yields higher. "We'll argue that the latter [corporate deals] is having a disproportionate impact at the moment," wrote Ian Lyngen, head of U.S. rates strategy for BMO Capital Markets' fixed-income strategy team.
Some of the U.K.'s wounds are self-inflicted. U.K. gross domestic product flatlined between July and September, suggesting that the British economy is stagnating. That spells trouble for Keir Starmer's Labor government, which has unveiled big increases to taxes and spending since it took power in July.
The risk that an economic slowdown will hurt tax revenue, leaving the government short of the funds it needs to finance its plans, raises the likelihood of more borrowing. Increased bond supply always worries investors.
"Recent spike in gilt yields has raised new questions about the fiscal picture [while] several surveys of inflation expectations [are] also moving higher," J.P. Morgan writes. "New year, new fiscal pressures."
The budget and debt-issuance jitters in the U.K. have a parallel in the U.S., where bond investors are concerned about fiscal policy under the incoming Trump administration. His plans for tax cuts could mean the government would need to issue more debt to make up for a larger shortfall between spending and revenue.
Considering the factors that could further lift Treasury yields and the potential for that to affect fixed-income securities abroad, the turmoil in the market for long-dated debt could get worse.
"The stars are aligning for record gilt yields," wrote Michiel Tukker, senior European rates strategist at ING.
Rising yields overseas could conceivably push rates higher in the U.S. "It's with this backdrop that we're reluctant to assume that the selloff [in U.S. Treasuries] has run its course," Lyngen wrote. Buying longer-dated debt "won't be our approach this week, however, owing to the ongoing hefty issuance calendar as well as the risk of further contagion from higher gilt and bund yields."
The yield on 10-year Treasury debt broke a four-day streak of gains on Thursday, declining 0.011 percentage point to 4.680%. A strong auction of 30-year Treasury debt on Wednesday helped support prices: Investment funds bought 87.3% of the $22 billion of debt on offer, versus the average of 85.1%.
Strong auctions need to continue for bond investors to feel a sense of calm.
Write to Karishma Vanjani at karishma.vanjani@dowjones.com.
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(END) Dow Jones Newswires
January 09, 2025 16:20 ET (21:20 GMT)
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