Bond market sell-off cools slightly as oil price falls
Back in the bond markets, the early jump in borrowing costs this morning is slightly calming.
The yield (or rate of return) on UK 10-year bonds is only up 2 basis points (0.02 of a percentage point) at 5.22%, having earlier traded as high as 5.29% (an 18-year high).
30-year bond yields have also calmed – up 2 bps at 5.86%, having traded over 5.91% earlier this morning.
Yields have eased back since Andy Burnham’s first prime minister’s questions today, where he pledged to stick to the UK’s fiscal rules – that might reassure investors that they won’t see a borrowing splurge in the autumn budget.
But it also reflects a wider calming in the bond markets – where the yields on US government debt are slightly lower today.
And that’s being helped by a drop in the oil price – Brent crude is now down 1% today at $93.83 a barrel, having hit $97 this morning.
Key events
The rise in government bond yields arguably reflects a market doing its job.
Investors are wary that certain governments aren’t controlling their spending or prioritising deficit reduction (such as the US), and thus demanding a higher rate of return (yield) for holding debts.
Lauren van Biljon, senior portfolio manager at Allspring Global Investments, explains:
The sell-off is being driven by two related concerns. Namely, persistent inflation uncertainty, and a renewed focus on debt sustainability amidst fiscal pressure. Markets are demanding a higher term premium to lend to governments for longer periods, particularly in countries with rising borrowing requirements, driving up yields on longer-dated bonds.
Concurrently, shorter-dated securities are feeling the pressure from the renewed rise in commodity prices, which risks increased persistence in inflationary pressures. Alongside better-than-expected global growth, this could force central banks to be more hawkish than currently expected, and for a longer period.
Van Biljon adds that the UK, Japan, and countries in the EU are all exposed to higher commodity prices, which creates more pressure on their bond yields – and could prompt central banks to raise interest rates.
“We expect additional cautious tightening from the European Central Bank, and a Bank of Japan that continues to tighten but at a disappointing pace. The Bank of England could be forced to follow suit later in the year but will be data-driven (wages/labour markets in particular).”
Over in the US, private employers have posted their slowest pace of job creation since January.
Data provider ADP has reported that US private sector employment rose by just 38,000 in August, which is the slowest pace of job creation since January, adding:
Manufacturing, professional services, and information shed jobs. Education and health care, construction, and leisure and hospitality all showed solid hiring.
That might possibly help to cool the bond markets too – as a weakening US jobs market might deter the US Federal Reserve from raising interest rates soon to fight inflation…
Bond market sell-off cools slightly as oil price falls
Back in the bond markets, the early jump in borrowing costs this morning is slightly calming.
The yield (or rate of return) on UK 10-year bonds is only up 2 basis points (0.02 of a percentage point) at 5.22%, having earlier traded as high as 5.29% (an 18-year high).
30-year bond yields have also calmed – up 2 bps at 5.86%, having traded over 5.91% earlier this morning.
Yields have eased back since Andy Burnham’s first prime minister’s questions today, where he pledged to stick to the UK’s fiscal rules – that might reassure investors that they won’t see a borrowing splurge in the autumn budget.
But it also reflects a wider calming in the bond markets – where the yields on US government debt are slightly lower today.
And that’s being helped by a drop in the oil price – Brent crude is now down 1% today at $93.83 a barrel, having hit $97 this morning.
Uber cutting 3,300 jobs
Newsflash: Ride sharing, food delivery and robotaxi group Uber is cutting 10% of its staff, Bloomberg are reporting.
The cuts will wipe out around 3,300 roles, in a massive restructuring aimed at reducing management layers and reallocating spending.
Bloomberg explain:
Chief executive officer Dara Khosrowshahi announced the changes in an email obtained by Bloomberg News, saying that Uber’s growth in recent years has created “more layers, more coordination, more fragmented ownership, and in some cases structures that made sense when businesses were smaller but no longer serve us well at our current scale.”
Burnham: We’ll stick to the fiscal rules
Over in parliament, prime minister Andy Burnham has pledged to stick the UK’s fiscal rules, as the UK tries to calm the bond markets.
Burnham was asked about about the rise in government borrowing to an 18-year high, and the concerns voiced by Lord O’Neill last night (see opening post).
Burnham replied that he and Jim O’Neill had worked together in Manchester to stimulate its economy.
Reminding MPs about the chaos of Liz Truss’s administration, Burnham suggested that the turbulence on global markets is due to the exposure which the then-governing Conservative party left behind.
He says the Labour government is turning the corner, with the fastest growth in the G7 this year, and cutting the UK deficit faster than any other G7 country.
And the PM pledges:
This will be a government grounded in fiscal responsibity, it will stick to the fiscal rules.
But at the same time we will help reduce cost of living pressures on our constituents.
My colleague Andy Sparrow is live-blogging all the action from PMQs:
O’Neill: bond markets would like to see action on ‘excesses of the triple lock’
Economist Lord Jim O’Neill has hinted that the government could rein in the pension triple lock to placate the bond markets.
Speaking to Times Radio, Lord O’Neill argued the Budget would have to include either spending cuts or “some form of tax increases” in order to restore the Government’s “headroom”.
Lord O’Neill suggested the bond markets would “respond favourably” to a Government that takes “credible action to deal with the excesses of the triple lock or the excesses of welfare spending”.
As we reported last night, the bond market sell-off could wipe out half of chancellor John Healey’s headroom to keep within the UK’s fiscal rules.
The bond market sell-off could prompt the Bank of England (BoE) to reconsider whether to continue with its own sale of UK government debt.
The BoE is due to decide later this month whether to maintain its ‘quantitative tightening’ programme, or slow it down.
QT involves the sale of UK gilts which the BoE bought to stimulate the economy after the 2008 financial crisis and the Covid-19 pandemic. It is controversial as the Bank is making a loss, by selling bonds for less than the value it paid for them under ‘quantitative easing’.
Professor Costas Milas, of the University of Liverpool’s management school, explains why the Bank might slow the pace of QT:
The ongoing global shock is indeed a challenge for Burnham as it puts firmly the focus on his fiscal intentions and whether next month’s Budget will raise taxes without doing much ( or anything) about lowering government expenditure. But let us not forget that the BoE’s policymakers will also decide in mid-September on UK interest rates and Quantitative Tightening (QT; or sales of government bonds) for the next 12 months.
With UK (and global) yields on the rise and Scott Bessent authorizing a buyback of U.S. debt to suppress, as much as he can, US yields, it will look very odd if the BoE’s policymakers decided to continue aggressively with QT action…
Competition watchdog takes a look at E.ON/Ovo deal
A deal to create the UK’s biggest energy supplier is to be probed by competition regulators.
The Competition and Markets Authority has announced it will start investigating the takeover of UK energy firm Ovo by German rival E.ON.
That deal, announced in May, would create a combined company with about 9.6m customers.
The CMA will now decide whether the deal could lead to a substantial lessening of competition, which could prompt a more detailed “Phase Two” investigation.
Charts: Borrowing costs and oil price rising
Here’s a chart showing how UK borrowing costs have risen again today:
Dollar at two-week high
The US dollar has climbed to its highest level against a basket of other currencies in over two weeks today.
Traders are betting that the US Federal Reserve is more likely to raise interest rates at its next meeting in September, after Fed chair Kevin Warsh warned last week that there would be “work to do” unless inflation eases.
This has pushed the pound down below $1.35, for the first time since 14 August.
The euro has dipped to $1.1575, the lowest since 18 August.
Bond sell-off is headache for Burnham and Healey
More investors and economists are warning that the bond market turmoil creates headaches for prime minister Andy Burnham and chancellor John Healey.
Daniel Mahoney, senior uk economist at Handelsbanken, warns that it could lead to tax rises in the budget:
“The 10-year gilt yield has hit levels last seen during the Global Financial Crisis. Recent drivers of increasing gilt yields have been broadly international – including geopolitical risk and competition for investor capital in the context of the AI boom – but it continues to be a major concern that UK government borrowing costs remain notably higher than G7 counterparts.
“If geopolitical risk recedes later this year, as we currently project, we do expect to see some easing of gilt yields in the future. Moreover, the spread between gilt yields and other G7 sovereign debt yields may end up narrowing next year as political risk rises up the agenda in continental Europe. But current moves in financial markets are clearly set to further erode the Government’s fiscal headroom at the upcoming Budget, adding to the likelihood that fresh tax increases will be announced on 28th October.”
Matthew Amis, investment director for rates management at Aberdeen Investments, agrees that the government is rather hemmed in:
“Gilts played catch-up with European peers yesterday after Monday’s bank holiday. The summer holidays are over and yet the Iranian conflict is still no closer to a resolution. Tensions in the Middle East increased again last night, as such both oil and natural gas moved higher. Uk 10 Year gilt yields are up over 10bps this week.
“At the front end of the UK curve, markets are now pricing in three hikes from the Bank of England over the next year. Gilt yields look elevated here but until oil and gas start freely moving in the Straits of Hormuz, gilt yields are going to struggle. On the politics front, PM Burnham delivered his maiden speech to parliament yesterday. From a gilt market perspective, I don’t think we learnt anything new. But what is clear is with gilt yields at these levels, the fiscal room for manoeuvre going into October’s budget is incredibly limited.”
UK and European gas prices hit highest since January 2023
European gas prices have hit their highest level since January 2023 this morning, as the Iran war drives up energy costs.
The benchmark Dutch gas contact touching a 43-month high of €75.325/MWh this morning.
The month-ahead UK gas price also hit its highest level since January 2023, at 184p per therm.
This will make it increasingly expensive for European countries to stock up on gas ahead of the winter – at a time when EU gas stores are at their lowest level in 13 years
Analysts at Mind Energy said:
“The market had hoped that the U.S. and Iran would be able to reach some sort of agreement, that allowed Hormuz to reopen, but is now starting to price in a long-lasting closure of the Strait and a very bad supply situation ahead of the upcoming heating season.”
London bus strikes postponed after ‘significantly improved offer’
Away from the bond markets, London bus strikes scheduled for this weekend have been postponed after workers received a “significantly improved offer”.
Members of Unite working for Arriva North London had been due to walk out on Friday, in protest over working conditions in the heatwave.
The strike threatened disruption to services at dozens of routes in the capital.
Instead, workers will now be balloted on an improved offer.
Unite general secretary Sharon Graham said:
“Unite is determined that the conditions of bus drivers are improved in London and beyond.
“We expect bus operators to treat workers with dignity and respect and will be ensuring that this happens.”
The Guardian reported last month that many drivers are concerned that proposals to improve the air-conditioning system across Arriva North London’s fleet of 730 buses may not be finished by next summer.
Uh oh. Investment bank Jefferies is cutting its appetite for risk, due to the jump in bond yields and the ongoing US-Iran war.
Jefferies’ Mohit Kumar explains:
We are toning down our risk view by a notch.
Rates are reaching a level where a further selloff in rates would be increasingly negative for both equities and credit. Unfortunately, we do not see an immediate catalyst that would bring rates materially lower from current levels.
There is no easy way out of the Iran war. We still remain optimistic that we would get a deal before the mid terms, but we do not think we are at the pain points where either US or Iran would agree to a deal.
Shares have dipped in London in early trading, pulling the FTSE 100 index of blue-chip equities down by 39 points, or 0.36%.
Technology and services provider Computacenter are the top faller, down 3.5%, followed by sports and leisure-wear retailer JD Sports (-2%).
The bond market turmoil means the UK faces ‘even more complicated’ choices ahead of the autumn budget, points out Roger Lee, head of equity strategy at Cavendish.
“This latest series of US air strikes on Iran, and the inevitable retaliation, pushed oil prices to around $95/bbl, a five-week high.”
“Whilst this is very much a global sell off in government bonds focused on countries with high deficits and/or high absolute debt levels, given the UK’s fiscal position gilts are seen as especially exposed”
“Pressure in the bond market will amplify the UK’s fiscal challenges.”
“The current level of bond yields is likely to erode most of the previous headroom leaving new PM Andy Burnham with even more complicated budget choices in October.”
Why are the bond markets having a wobble?
Mike Goosay, CIO and global head of fixed income at Principal Asset Management, has summed-up the reasons behind the bond-market sell-off:
“The sharp rise in global bond yields reflects investors reassessing inflation risks, policy expectations, and the growing supply of government debt across major markets.
While markets are increasingly pricing the possibility of additional policy tightening, we believe higher long-term yields also reflect structural factors such as elevated issuance, ongoing fiscal financing needs, and a rise in term premium.
“While today’s volatility may feel disruptive, it is also improving the long-term opportunity set across fixed income markets. Higher yields are enhancing both income and return potential, creating opportunities that have been largely absent for much of the past decade. For long-term investors, periods of market repricing can often present attractive entry points, particularly when economic and credit fundamentals remain as resilient as they do today.
Germany’s 10-year government bond yield has hit its highest level since April 2011; it’s currently up 3.8 basis points to 3.3763%.
That underlines that this is a global sell-off – with government bonds in the US, Japan, India and Australia, for example, all weakening.