Bailey urges credible debt plans as bond selloff deepens

A worldwide selloff in government bonds pushed long-term borrowing costs in the United States and Britain to their highest levels in more than two decades this week. Higher oil prices linked to the Iran war added to inflation fears, and investors grew more worried about heavy public debt. Speaking in Istanbul on Thursday, Bank of England Governor Andrew Bailey said governments must show "more than ever" that their plans to repair public finances are credible.reuters

The 30-year U.S. Treasury yield reached 5.7% on Wednesday, its highest level since 2002, Il Foglio reported. The 30-year gilt yield rose to about 6.04%, a high last seen in 1998. The benchmark 10-year Treasury yield touched a 24-year high of 5.365% before easing after strong demand at a 10-year auction, according to Saxo UK strategist Neil Wilson. British gilt yields rose further on Thursday as part of a global selloff triggered by another jump in oil prices, Reuters reported.ilfoglio+2

Oil and rate-hike bets

Brent crude rose nearly 4% to touch about $104 a barrel on Thursday. The move followed an Axios report that the Pentagon had told U.S. Central Command to finish preparations for resuming major combat operations against Iran. According to the report, no timeline was set and President Donald Trump has not made a final decision. Traders now see an 83% chance that the Bank of England raises rates in November, according to LSEG data cited by The Wall Street Journal News Corp ↘ 0.03%.investorschronicle+1

The pressure has spread across Europe. French government bonds have been hit hardest because of worries about the country's budget. "France could be the first" to face a reckoning over its debt, "but it won't be the last," Citi's Akshay Singal told the Financial Times, as quoted by Il Foglio. The FTSE 100 fell to its lowest level since June 23, and the CAC 40 dropped for a second session. In the U.S., the average 30-year fixed mortgage rate rose to 7.49%, the highest in almost three years, according to the Mortgage Bankers Association.wsj+2

Bailey warns of fragility

At a conference organized by Turkey's central bank, Bailey said: "Whatever the stance of fiscal policy is, it must be credible and directed at stability, and to be seen to be such by markets." He described recent market moves as "some way from normal" but said markets were not yet stressed or illiquid.reuters

Bailey said leveraged investors now play a much bigger role in government bond markets than traditional long-term holders. In his view, that change lets markets absorb more debt but also makes them less stable.aa

"Greater absorption has come with greater fragility. Leveraged positions can be unwound rapidly," he said. He warned that margin calls and forced selling could amplify market moves.reuters

Higher gilt yields are adding to the strain on British public finances ahead of the October 28 budget.wsj