UK Bonds, Currency, and Stocks Slump — Is a U.S. Market Pullback Next?

On Tuesday during London trading hours, Britain’s long-term borrowing costs surged to their highest levels since 1998, putting UK bonds at the center of a global selloff. The move was driven by several factors: deep worries about the UK economy, rising bond yields worldwide, and aggressive government spending plans across major economies. The UK’s 30-year gilt yield jumped to 5.68% on Wednesday, marking the second day in a row of fresh 27-year highs. The 10-year yield climbed another 3 basis points to 4.78%. At the same time, the pound slid as much as 1.5% against the U.S. dollar to 1.33355. European equities sold off in tandem: Germany’s DAX dropped 2.22%, the FTSE 0.91%, France’s CAC40 0.70%, and the Euro Stoxx 50 1.47%.

Source: TradingView

A Global Bond Market Selloff

The turbulence in gilts isn’t an isolated story. It reflects the fact that borrowing costs are rising pretty much everywhere. Most major economies today carry government debt loads above 50% of GDP, with North America, Europe, and Japan particularly stretched.

• U.S. Treasuries: Yields have been relatively stable, but Trump’s repeated pressure on the Fed’s independence has weighed on sentiment. On top of that, Congress keeps approving spending way beyond revenues, feeding into higher long-term yields.

• Germany: Plans for major spending increases have pushed its 30-year bond yield to a 14-year high.

• Japan: Long-term JGB yields climbed another 8 bps to 3.28%, with markets worried about inflation, political turmoil, and swelling government spending.

But among G7 peers, the UK stands out as the worst: sky-high inflation, heavy debt burdens, and sluggish growth have made investors especially nervous.

A Fiscal Headache for the New Government

Soaring borrowing costs are an economic and political nightmare for Prime Minister Keir Starmer’s new government. Chancellor Rachel Reeves is under huge pressure ahead of the autumn budget to find savings or raise taxes in order to restore fiscal credibility.

Source: International Monetary Fund

Fresh data only adds to the gloom: August manufacturing PMI was revised down to 47.0, the lowest in three months, signaling a continued contraction. According to S&P Global, new orders fell sharply, with both domestic and export demand weakening at one of the fastest paces in two years.

Structurally, there’s another problem: traditional buyers of ultra-long bonds, like pension funds, have been stepping back, while concerns about sticky inflation are rising. Over the past 12 months, the 30-year gilt yield has risen more than 100 bps, far more than U.S. Treasuries or German Bunds. The UK’s heavy debt issuance has been a big part of this.

To regain control, Starmer announced changes to his Downing Street team earlier this week, but markets are waiting to see whether his government can deliver a credible fiscal plan to break this “vicious cycle.”

Bond Turmoil Meets Tariff Uncertainty

Adding fuel to the fire, U.S. trade policy risks resurfaced on the same day. On Friday, the U.S. Court of Appeals ruled that former President Trump exceeded his legal authority when he used the 1977 International Emergency Economic Powers Act (IEEPA) to impose certain tariffs. Legally, the ruling undermines Trump-era tariffs, but in practice, little is likely to change soon.

The tariffs deemed invalid will remain in place at least until October 14, giving the government time to appeal to the Supreme Court. Treasury Secretary Bessent said a defense is being prepared, and even if the IEEPA basis fails, the administration could fall back on other trade laws, such as Section 338 of the Smoot-Hawley Tariff Act of 1930.

The Supreme Court may not hear the case until early 2025, with a final ruling potentially coming by mid-year. Meanwhile, Trump has promised tariffs on other industries like pharmaceuticals, electronics, and furniture.

Risk Aversion Spikes: VIX and Gold Surge

The risk-off mood showed up clearly in volatility and safe havens:

• The VIX fear index $Cboe Volatility Index(VIX)$ jumped 20% intraday to 19.27.

• Spot gold $ETFS Physical Gold(GOLD.AU)$ spiked past $3,500/oz in Asia, briefly eased during the European session on a stronger dollar, then ripped to a record close of $3,534 after U.S. markets opened.

U.S. Equities Under Pressure

U.S. stocks opened sharply lower under the weight of a stronger dollar, before bouncing slightly into the close. The Dow $Dow Jones(.DJI)$ fell 0.55%, the S&P 500 $S&P 500(.SPX)$ 0.69%, and the Nasdaq $NASDAQ(.IXIC)$ 0.82% (after being down over 1% intraday).

Technically, the Nasdaq’s daily chart is showing the outlines of a potential head-and-shoulders top. The neckline is still holding, but if it breaks, downside could open up quickly.

Source: TradingView

The next few days could be choppy:

• Wednesday/Thursday bring JOLTs job openings, ADP employment, and initial jobless claims.

• Friday’s nonfarm payrolls are the big test. Historically, market reactions to payrolls can be counterintuitive — strong data can hurt stocks if yields jump, while weak data can raise recession fears.

Bottom line: with the dollar firm and risk appetite fading, the major U.S. indices remain under pressure in the short run.

Invesight Viewpoint

The UK’s triple shock — bonds, currency, and equities — has rippled across the globe, fueling a broad bond market rout. At its core, this is about investors losing faith in fiscal sustainability and bracing for sticky inflation. Add in tariff uncertainty, and the result is a surge in fear: VIX up 20%, gold at record highs.

For U.S. markets, the near-term path hinges on jobs data. Even though stocks are under pressure now, a strong payrolls print could flip the narrative quickly. Either way, risk management is critical here — volatility is back, and global markets are on edge.