An oil shock tied to the Iran war has pushed government bond yields sharply higher worldwide, with the UK, India and Australia all posting multi-year highs and the IMF warning of mounting pressure on developing economies. The sell-off has piled pressure on UK Chancellor John Healey ahead of his October 28 Budget.
Oil shock drives global bond sell-off
The sell-off has stemmed from soaring energy prices after oil and gas supply was disrupted by the Iran war. Brent crude, the international benchmark, climbed above $95 per barrel on Wednesday, its highest level in nearly six weeks.
The move has spilled into government bond markets, where investors are demanding higher yields as energy costs push up inflation expectations. The UK 10-year gilt yield reached 5.294% on September 2, its highest since August 2007, while 30-year borrowing costs have been around their highest since 1998. The 10-year gilt climbed a further four basis points on Wednesday morning to near 5.27%, following a rally the previous day that saw yields spike as much as 15 basis points. Longer-term gilt yields rose five basis points to almost 5.89%, nearing Tuesday's highs.
Similar moves are unfolding elsewhere. India's 10-year bond yield topped 7%, while Australia's equivalent surged to a 15-year high above 5.2%.
IMF flags spillover risk for developing economies
IMF managing director Kristalina Georgieva raised the alarm at a G20 meeting of finance ministers and central bank governors in the US. According to Oilprice.com: "The increase in global interest rates is of particular concern." She added that the sovereign debt landscape for emerging and low-income countries has improved gradually in recent years, but progress has been uneven amid persistent risks and spillovers from rising yields in advanced economies.
UK budget headroom under threat
The bond sell-off has piled pressure on Chancellor John Healey, who is set to deliver his first Budget on October 28. Bloomberg economists forecast Healey will see £12bn knocked off the £23.6bn in headroom left by former Chancellor Rachel Reeves in the 2025 Budget, raising the prospect of spending cuts or tax increases.
Chris Beauchamp, chief market analyst at IG, said the situation is particularly acute for the UK, where rising borrowing costs collide with high existing debt levels. He noted that a Bank of England rate hike becomes more likely with every additional dollar added to the price of oil.
Source: Oilprice.com
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