A sell-off in US government bonds is underway as markets position for US interest rates to stay higher for longer amid positive US economic data.
A raft of upbeat US economic data has poured cold water on hopes of a rate cut early next year and many now see interest rates remaining higher for a prolonged period.
US 10-year bond yields were 4.80% on Wednesday morning – the highest level since 2007.
As bond prices fall and yield rise, the impact on borrowing costs is hitting interest-sensitive assets, such as equities, corporate bonds and the government bonds themselves.
For people within the UK, a potential side effect of the US government bond rout is higher yields in UK bonds and higher borrowing costs which could have wide-reaching implications including lower corporate profits, reduced investment and they could even affect housing prices.
Steadily increasing US bond yields have helped support the dollar and send GBP/USD down to 1.2124. GBP/USD had been as high as 1.319 in July.
A weaker pound can be supportive of the FTSE 100’s overseas earners but if global debt yields increase in line with US treasuries, it will increase funding costs for major corporations.
There will also be concerns around the UK housing market, although we are yet to see any major disruption. Should yields continue to rise it could impact mortgage rates and further curtail activity in UK property.