Bond yields surge to 15-year high as rate-hike fears mount

UK Bond yields surged to a 15-year high and the FTSE 100 plunged yesterday as financial markets bet that interest rates will climb to 6.5 per cent next year.

The yield on benchmark ten-year bonds, which is the rate investors demand for lending to the Government over that period, topped 4.7 per cent, surpassing levels seen in the market turmoil after Liz Truss’s mini-Budget last autumn.

And the FTSE 100 tumbled by 161.60 points, or 2.2 per cent, to 7280.50, hitting its lowest level in more than three months. It was the biggest one-day fall since March.

The second-string FTSE 250 fell by 2.6 per cent, or 476.87 points, to 17,916.46.

It was part of a turbulent global response to fears over rising interest rates. And the increase in bond yields adds to the evidence of pressure on the Government’s balance sheet being caused by rising rate expectations.

A day earlier, Britain’s Treasury sold £4billion worth of two-year bonds to investors at the highest rate since 2007.

If interest rates do hit 6.5 per cent in the UK – up from 5 per cent now – they would be at their highest point since 1998, deepening the misery facing borrowers who have already seen mortgage rates climb sharply.

Markets were yesterday even betting on a more-than-40 per cent chance of a 6.75 per cent rate next year.

More than two million borrowers whose cheaper rate deals are due to expire over the next 18 months already face hundreds of pounds being added to their bills. 

The prospect of the crunch getting worse is creating further pessimism about the risk of a ‘hard landing’ – the possibility that the Bank of England will need to put up interest rates by so much that it stokes a recession.

‘Investors’ expectations for future BoE hikes have only become more aggressive in recent days,’ strategists at Deutsche Bank wrote in a note to clients.

JP Morgan economist Allan Monks suggested in a recent note that there is a risk that they may need to go as high as 7 per cent to bring stubbornly high inflation under control.

Yesterday’s global turmoil came after the minutes of last month’s US Federal Reserve meeting were published on Wednesday. 

They showed that, even as the Fed left rates on hold for the time being, most officials at the central bank expected them to go up again.

Further jitters followed yesterday when a survey pointed to a much stronger than expected US jobs market last month.

The Fed is seen as unlikely to ease back on interest rates until there are signs of a deterioration in employment.

On Wall Street, the Dow Jones was 1 per cent lower, and the S&P 500 and Nasdaq were down by 0.8 per cent. In Europe, Germany’s Dax fell 2.6 per cent and France’s Cac 40 by 3.1 per cent.

Germany’s two-year bond yield hit its highest level in 15 years.

Yields on US bonds leapt too.