UK 30-Year Bond Yields Hit Highest Since 1998; European and U.S. Long-Term Bonds Tumble

TradingKey - On Tuesday during the European session, UK 30-year government bond yields surged to 5.697%, marking the highest level since 1998. This spike was driven by growing concerns over the UK’s economic outlook, coupled with a global rise in long-term bond yields.

This apprehension echoed in the currency market as well, with the British pound falling over 1% against the dollar to 1.3381 and dropping 0.6% against the euro to 1.1495.

Deutsche Bank has commented that the decline in UK bonds represents a vicious cycle: concerns over the sustainability of UK finances elevate yields, thereby worsening debt dynamics, which in turn further drive yields upward.

The rising yields indicate higher borrowing costs, presenting a significant challenge for the UK government. A previously proposed plan to cut disability benefits to save £5 billion was rejected in July. Labour MPs opposed welfare reforms, forcing a 180-degree turn by the government, which may face similar political resistance in the autumn budget. Moreover, the failure to cut spending might lead the government to consider further tax hikes.

UK Chancellor Reeves is confronted with a dilemma in the autumn budget: either improve fiscal health through spending cuts or tax increases or opt for a more moderate approach to avoid a secondary economic hit. Jefferies analysts noted that tax hikes might be inevitable, yet the UK might be at a stage where such increases could backfire.

Research suggests that once a critical threshold is crossed, tax hikes can actually reduce revenue. Last year’s budget tax measures failed to reduce the deficit and instead hindered investment and hiring; similarly, increased taxes on wealthy foreigners have backfired, leading them to leave the UK. Consequently, Jefferies holds a negative view on UK long-term bonds, anticipating a continued steepening of the yield curve.

In Europe, expectations of increased defense and infrastructure spending have led to rising yields on Eurozone ultra-long bonds. Germany’s 30-year bond yield rose to 3.41%, a 14-year high, while Spain's 30-year bond yield briefly touched 4.297%, the highest since November 2023, and Italy’s 30-year bond yield climbed to 4.661%, the highest since April.

Amidst the mounting debt situation in European countries, UK economists have warned that London might soon face a financial crisis requiring foreign assistance. French Finance Minister Eric Lombard indicated that France might similarly need aid.

The global decline in long-term government bonds stems from multiple overlapping factors. According to data from the Bank for International Settlements, a third of bond yield changes in Europe can be directly traced to US bonds. Rising US Treasury yields drive up yields on bonds from France, Germany, the UK, and Japan.

Recently, with the growing threat to the Federal Reserve’s independence, some economists have warned that long-term rates on the yield curve could sharply increase. Currently, the 30-year US Treasury yield hovers around 5%.

Investors are keeping a close eye on economic data that could affect bond markets. This Friday’s US non-farm employment data will be a focal point, as traders await confirmation of their bets on a Fed rate cut in September; Eurozone inflation data is also under scrutiny. The UK is set to issue a new 10-year bond this week, expected on Tuesday, with bond supply pressures potentially impacting UK bonds.