In another example of the bond market sell-off, foreign investors sold China’s onshore yuan bonds for the 12th consecutive month in April, Reuters reports, citing official data.
Foreign institutions held 3.12trn yuan (£340bn) in bonds traded on China’s interbank market as of the end of April, the central bank’s Shanghai head office said, down from 3.19trn yuan a month earlier.
European Central Bank head Christine Lagarde was asked by reporters if she was worried about the bond market sell-off when she arrived in Paris for the G7 meeting.
Lagarde replied:
“I always worry, that’s my job.”
Pound rises, after a bad week
After falling every day last week, the pound is recovering some ground this morning.
Sterling has risen by over half a cent to $1.338 against the US dollar so far this morning.
Last week the pound fell by over three cents, its biggest weekly loss since last 2024, amid fears of higher fiscal spending if Andy Burnham became PM.
This morning, traders are digesting Burnham’s support for the existing fiscal rules, and warnings that the Manchester mayor faces a perilous race to win the Makerfield seat.
Some more photos of arrivals at the G7 finance meeting in Paris have arrived:
Iran has revealed it has responded to a new US proposal aimed at ending the war in the Middle East.
Foreign ministry spokesman Esmaeil Baqaei told a press briefing:
“As we announced yesterday, our concerns were conveyed to the American side.”
Brent crude oil has slipped back to $110.40 a barrel, up 1% today, having hit $112/barrel early today.
UK 30-year yields fall back from 28-year high
Encouraging news! The UK’s long-term cost of borrowing has dropped this morning.
The yield (or interest rate) on Britain’s 30-year bonds has dropped to 5.808%, a drop of four basis points (0.04 of a percentage point) today.
That pulls 30-year yields down from the 28-year high of 5.85% set on Friday afternoon, when the City was fretting about a potential UK leadership race.
Andy Burnham’s attempt last weekend to reassure the markets by pledging “I support the fiscal rules” may be calming investors’ nerves, after UK bond yields pushed higher last week.
Those fiscal rules are designed to reassure the markets that the government is committed to bringing down the national debt in future years, which gives investors more confidence to lend London money.
Neil Wilson, Saxo UK investor strategist, says:
Andy Burnham says he will stick to the fiscal rules but this Labour leadership debate is turning the microscope on a much broader issue; whether the UK can find the leadership to deliver a credible plan to fix the nation’s finances. Tough medicine is required but no one seems willing to administer.
Germany’s top central banker, Joachim Nagel, has declared that central bankers can do “a lot more” to calm the financial markets, as he arrived in Paris for the meeting of G7 finance chiefs.
Bank of England interest rate-setter Megan Greene has warned that the inflationary impact of the Iran war may not be be temporary.
Speaking at a Financial Times event this morning, Greene says:
“This is our third negative supply shock in five years. We do have to worry about wage and price setting.
“Traditionally you look through negative supply shocks, but I think when you have successive ones, actually that’s outdated folklore and we shouldn’t be looking through them anymore.”
Greene was among the eight policymakers who voted to leave UK interest rates on hold at the Bank’s latest monetary policy meeting at the end of April, when chief economist Huw Pill cast the lone vote for a rate rise.
Shares in hotel group Whitbread have jumped 2.4% this morning as an activist hedge fund urges the company to put itself up for sale.
In a letter to Whitbread’s board seen by the FT, Corvex Management’s managing partner Keith Meister said:
“It is imperative that the board immediately retains an independent investment bank and makes a public commitment to conduct a rigorous and comprehensive sale process.”
Last month, Whitbread announced it would shut its remaining Beefeater and Brewers Fayre restaurants as the Premier Inns owner resets its five-year business strategy following pressure from Corvex.
UK 10-year bond yields hit new 18-year high
Boom! Britain’s cost of borrowing for a decade has hit its highest since the financial crisis in 2008.
Despite Andy Burnham’s attempts to reassure bond investors by saying he supports the fiscal rules, UK government bonds are still being buffeted by the global turmoil in the markets today.
This pushed the yield (or interest rate) on 10-year gilt yields up to 5.19%, over the 18-year high hit last Friday.
Mohit Kumar, economist at investment bank Jefferies, says inflation and deficit worries are weighing on the bond market, and the political crisis in the UK may have focused attention on these problems:
Inflation and deficit concerns have been in the background for a while. UK was probably the catalyst for bringing these concerns to the fore.
Political uncertainty and the challenge to PM Starmer has raised concerns of a policy shift towards the left. UK fiscal picture has already been in a poor shape as the Government was unable to delivery on spending cuts.
A shift to the left would imply a further increase in public spending, even though the government does not have the fiscal room to do so. Tax rises have already reached a stage where further rises in taxes are likely to be prove unproductive and unlikely to generate additional revenue.
Photos: Reeves and Bailey in Paris for G7
The head of the International Monetary Fund has said that a sell-off in global bond markets was reflecting the impact of higher oil prices.
IMF managing director Kristalina Georgieva was speaking as she arrived for a meeting of G7 finance ministers in Paris, Reuters reports.
FTSE 100 hits lowest since 31 March
Britain’s stock market has hit a six-week low at the start of trading in London.
The FTSE 100 index of blue-chip shares dropped to 10,151 points , a fall of 44 points of 0.4%.
UK housebuilders are among the big fallers, on concerns that higher interest rates will hit demand for homes and mortgages. BP (+2.2%) and Shell (+1.7%) are leading the risers as the oil price rises.
European stock markets are also weaker, with Germany’s DAX dropping almost 0.5% at the start of trading in Frankfurt.
Chris Beauchamp, chief market analyst at investing and trading platform IG, says:
“A combination of political turmoil and renewed gains for oil has been kryptonite for hopes of a new FTSE 100 rally.
Of course, the selling has not been confined to the UK, and continental indices are registering heavier losses as oil lurches higher once again. The market rally is rapidly coming to grips with the reality of the situation in the Middle East and in the global oil market, and it is not going to be pretty.”
Japan’s bond prices have been hit by the prospect of a debt-fuelled energy support package.
Today, prime minister Sanae Takaichi said she had told finance minister Satsuki Katayama last week to start work on compiling a supplementary budget, which could cushion the impact of the Middle East conflict on Japan’s economy.
According to Reuters, the extra budget will focus on funding government subsidies to curb gasoline and utility bills, as surging oil prices caused by the Middle East conflict cloud the outlook for an economy heavily reliant on fuel imports from the region.
The bond markets are signalling that we’re in a world of higher interest rates, geopolitical threats, expensive oil and uncertain politics.
Lale Akoner, eToro global market strategist, explains:
“Government bond yields are rising across the US, UK, Europe and Japan as investors reassess inflation risks, higher energy prices, political uncertainty and growing fiscal pressure. The move higher in yields suggests markets are increasingly accepting a ‘higher-for-longer’ interest rate environment.
“The concern for investors is that higher yields do not stay confined to bond markets. They can weigh on equity valuations, particularly in growth and technology sectors, while also increasing pressure on governments carrying large debt burdens.
“Markets are also becoming more sensitive to geopolitical risks. Rising oil prices and fears of disruption around the Strait of Hormuz are reviving inflation concerns at a time when many central banks were hoping price pressures would continue easing.
“For now, bond markets appear to be signalling that investors should prepare for a more volatile environment where higher borrowing costs remain a key market theme well into the second half of the year”.
Fears of 'stagflationary shock' hitting bonds
The jump in the oil price today has “exacerbated fears about a stagflationary shock” and pushed global bond yields even higher this morning, says Jim Reid of Deutsche Bank.
He told clients:
Admittedly, if you look over the entire conflict, bond yields have moved in lockstep with oil, and Friday doesn’t look too anomalous. However, if you zoom in a bit, then yields have shifted from being broadly in line with the current price of oil to looking a bit high relative to it. That suggests some evidence of a small decoupling on Friday.
With these end-of-week moves, 30yr US yields hit their highest level since 2007, 30yr Japanese yields their highest since their introduction in 1999, 30yr gilts reached levels last seen in 1997, and 30yr German yields returned to 2011 levels.
China heading for slowdown after April's economic data disappoints
Weak economic data from China is also worrying investors this morning.
Chinese factory output growth slowed to 4.1%, year-on-year, in April, down from 5.7% in March, data from the National Bureau of Statistics (NBS) showed today. That was despite a jump in exports as customers tried to stockpile goods to avoid supply disruption from the Iran war.
Retail sales growth slowed to just 0.2% in April – the weakest reading since December 2022 - down from 1.7% in March.
China’s fixed asset investment declined – to a fall of 1.6% year-on-year in January-April, down from a 1.7% rise in January-March.
Lynn Song, ING’s chief economist for Greater China, says:
It suggests a steep drop-off of investment in April as geopolitical uncertainty may have weighed on investment decisions.
This disappointing April economic activity suggests growth will decelerate in the second quarter, after the first quarter comfortably beat expectations, Song adds.
Oil at near-two-week high
The oil price has risen this morning, which will put more pressure on government bond prices.
Brent crude is up 1.77% at $111.16 a barrel, its highest level in nearly two weeks.
Anxiety over the Iran war rose today after a nuclear power plant in the United Arab Emirates was attacked over the weekend.
Tony Sycamore, analyst at IG, says:
These attacks serve as a pointed warning: any renewed US or Israeli strikes on Iran could quickly trigger more proxy assaults on Gulf energy and critical infrastructure.
French finance minister: bonds are not collapsing
French finance minister Roland Lescure has revealed that G7 finance ministers will discuss the situation in the bond markets when they meet in Paris today.
Lescure argued that global bond markets are undergoing a correction.
Asked if bond markets were collapsing, Lescure told reporters:
“They’re undergoing a correction - I wouldn’t say they’re collapsing”.
“We are no longer in a period where public debt is not a subject.”
Updated
Burnham: I support the fiscal rules
The global bond market sell-off means this is a bad time for UK politics to be gripped by a leadership crisis.
British government debt got hammered on Friday, as Keir Starmer’s premiership circled the plughole and likely challenger Andy Burnham limbered up to return to parliament by contesting a by-election in Makerfield, in the North West of England.
The yields on 30-year UK debt hit their highest since 1998 last week, with 10-year gilt yields the highest since 2008.
Those losses came amid warnings that if Starmer is replaced, the Labour government might shift towards higher spending and borrowing, cutting loose from the fiscal rules designed to reassure the bond markets.
However, Burnham tried to calm concerns that he might drive up spending. Over the weekend he told ITV:
“I support the fiscal rules, there needs to be a plan to get debt down.”
That pledge might provide some support for UK bonds today….
Bond market rout deepens as inflation fears keep rising
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The bond market is doing its traditional job of intimidating governments – and investors – as fears of an inflation shock from the Iran war grow.
The bond sell-off which gripped the markets last week is continuing this morning, driving up governments’ cost of borrowing from Tokyo to Washington DC.
With the strait of Hormuz still largely closed, the prospect of a lengthy period of shortages of oil and gas, which would push up costs of energy, transport and food, is growing.
Last Friday, global government borrowing costs soared – with the yield (or interest rate) on Japan’s 30-year bond hitting 4% for the first time.
US and eurozone debt also suffered, as traders bet that central banks will fored to raise interest rates, or abandon hopes of rate cuts, to stem the inflationary waves hitting the global economy.
As analysts at ING put it:
First, even if the war were to end tomorrow, energy prices may not fall as far as many expect. Significant drawdowns in oil inventories are likely to keep upward pressure on prices for some time yet.
Second, natural gas prices currently look too low. There is meaningful upside risk if disruptions persist into the third quarter, particularly as competition intensifies between Asian and European buyers for LNG.
It’s a reminder that, for all the political noise, its energy prices will remain the dominant force for central banks. It’s why we’re expecting rate hikes from the Bank of England and European Central Bank in June, and why we no longer expect a Federal Reserve rate cut until December.
This morning… US and Japanese government bonds have extended their losses, pushing up yields (which rises when bond prices fall.)
Benchmark 10-year U.S. Treasury yields jumped to their highest since February 2025 this morning at 4.6310%.
Yields on the 30-year Japanese government bond hit the highest level on record at 4.200%, while while the 10-year yield reached its highest since October 1996 at 2.800%.
The agenda
Today: G7 finance ministers meet in Paris
10am BST: IMF to present its Article IV report into the UK
Updated
