Nervous investors in major economies have been selling government bonds, increasing borrowing costs, as rising oil prices intensified concerns about inflation. On Thursday, the price of a barrel of oil rose 6% to more than $107, driven by worries that Houthi rebel advances along Yemen's Red Sea coast could disrupt Saudi crude exports.
This global bond sell-off, which has affected markets in recent weeks, resumed following developments in the Middle East, against a backdrop of increasing concern over government borrowing levels. Higher oil prices, already elevated since the resumption of hostilities in the Iran war, are anticipated to fuel inflation, potentially leading central banks to raise interest rates and slow economic growth.
The European Central Bank (ECB) increased its main interest rate to 2.5% on Thursday. ECB President Christine Lagarde stated that inflation is expected to be more persistent than previously thought and will remain significantly above target for an extended period due to ongoing Middle East conflict pressures.
In London, the yield on 10-year UK government bonds surpassed 5.37% during Thursday's sell-off, marking the highest borrowing cost since 2007. This presents a challenge for Chancellor John Healey ahead of his first budget on October 28, as higher interest rates on the UK's debt will increase the cost of future investment and reduce the Treasury's fiscal flexibility.
Unleaded petrol prices have already risen by 6p per litre since the beginning of September, according to the RAC. The prospect of higher energy bills due to rising oil and gas prices is likely to increase pressure on the government to assist consumers through the winter.
In the US, the yield on 10-year borrowing reached 4.92% on Thursday, its highest since 2023. This occurred despite US Treasury Secretary Scott Bessent's intervention on Wednesday, buying back $6bn worth of government debt in an attempt to lower yields.