GLOBAL bond yields have surged to their highest levels in years as renewed military action involving the US and Iran signals that a “major global crisis is on the way”.
Government borrowing costs have climbed sharply across the UK, US, Germany, Australia and Japan, as investors reassess whether central banks will be able to reduce interest rates – or could even be forced to raise them again.
A 10-year gilt, the rate for a 10-year loan to the British government, rose to 5.23% which is the highest since 2008.
The sell-off could have significant consequences for households and businesses as higher bond yields can feed through to more expensive fixed-rate mortgages, corporate loans and government debt repayments, while also putting pressure on shares and the value of existing bonds.
Savers may benefit from improved rates, although inflation could erode their returns.
Experts are divided over whether the moves signal a gathering global crisis or a painful return to more historically normal borrowing costs after years of ultra-low rates.
They also warn that the effect on Sterling will depend on whether investors focus on the appeal of higher UK yields or become increasingly concerned about inflation, weak growth and government borrowing.
Crisis
Dave Huggett, Founder at Lucid Foreign Exchange, said we may be saved by the Pound being strong.
He added: “Since the beginning of the decade, only two things have truly driven currency: inflation and interest rates. Right now central banks across all developed nations face the insurmountable decision of which to focus on first – GDP, or rising inflation. Of late, we have seen green shoots around growth, but with nagging inflation always struggling around 3%.
“We are still no nearer to the 2% target, but in reality, what relevance does 2% really have? Bond yields have reacted to the high level theory around conflict in the Middle East, rising oil prices and a situation that seems to have no end. The most important thing to remember is, that while bond yields are rising, that may be the very thing that helps bring inflation down in the UK.
“The weaker the Pound, the more inflation we import, due to the current account deficit we have created being a major importer of goods and services. If bond yields rise, the strength in the Pound might save us.”
David Belle, Founder and Trader at Fink Money, said the risks are real.
He added: “There are reasons for concern. Global government bond yields are around 3.7%, their highest since 2008, while US, Japanese and European yields have reached multi-year or multi-decade highs. Several pressures are converging: rising oil prices amid US–Iran tensions, persistent inflation, a hawkish Federal Reserve and heavy government borrowing.
“Higher rates increase debt-servicing, mortgage and corporate borrowing costs while putting pressure on growth stocks. If oil stays high and the Fed hikes, it could trigger a growth scare or stagflation. However, this is not another 2008. That crisis involved banks, housing and frozen credit markets, whereas credit spreads remain relatively contained and there is no broad funding panic today.
“Yields are also returning towards pre-quantitative easing norms. That hurts existing long-term bondholders but offers new investors better income. The risks are real, but higher yields alone do not signal a financial crisis.”
Tony Redondo, Founder at Newquay-based Cosmos Currency Exchange, said inflation is a concern.
He added: “Renewed military action between the US and Iran has stoked inflation fears and driven bond yields higher across the globe this morning, with the UK 10-year gilt yield hitting an 18-year high, the US a 3-year high, Australia and Germany 15-year highs, and Japan, its highest in 30 years.
“For the Pound, higher gilt yields offer near-term support via rate differentials. Still, energy shocks and flight-to-safety flows into the Dollar will cap gains, especially with Parliament back today and Prime Minister Andy Burnham facing his first Prime Minister Questions at noon tomorrow. Borrowers will feel it first as mortgage lenders push fixed rates higher as swaps track gilts, and anyone rolling off an old deal faces a brutal refinancing shock.
“Businesses face pricier borrowing while savers gain from rising deposit yields, though real returns hinge on beating inflation. Investors see fixed-income losses, pressure on growth valuations, and capital rotating into short-duration bonds and energy.”
Risks
Anita Wright, Chartered Financial Planner at Ribble Wealth Management, said a crisis is on the way.
She added: “First Japan. Then the US. Now Europe. The bond market is signalling that a major global crisis is on the way and it isn’t being subtle. Buckle up, it’s going to get rough. For Sterling, this is dangerous. The Pound is backed by twin deficits (fiscal and current account) and a government that reaches for gilt issuance the way the rest of us reach for coffee.
“When investors start questioning the debt, the currency is the release valve. For borrowers, the cheap money era is finished. Mortgage holders rolling off old fixes, and businesses refinancing, face rates their sums never allowed for. Debt taken on at 2% does not survive at 6%.
“For savers, higher yields look generous until inflation eats them. Bonds are no longer the safe harbour.”
Prem Raja, Head of Trading Floor at Currencies 4 You, said mortgage rates will be hit.
He added: “The rise in global bond yields reflects markets pricing in a renewed inflation threat from higher energy costs and the possibility of interest rates remaining elevated for longer. For the Pound, higher UK yields can provide some short-term support by making Sterling-denominated assets more attractive. However, this is not necessarily a vote of confidence in the UK.
“If investors become concerned about weaker growth, persistent inflation or government borrowing, Sterling could still come under pressure, particularly against the Dollar. For households and businesses, the implications are largely negative. Mortgage rates are unlikely to fall as quickly as previously hoped, while corporate loans, refinancing and investment funding will remain expensive. This could further restrict spending and growth.”
