European and UK Bond Selloff Continues, UK 10-Year Yield Hits 18-Year High
nashnova research
The UK 10-year gilt yield touched 5.29% intraday, the highest since August 2007; surging natural gas prices and repriced rate-hike expectations hammered European bonds while US Treasuries held flat, squeezing UK fiscal headroom further.
How severe is this sell-off?
The UK 10-year gilt yield rose as much as 7 basis points to 5.29%, the highest since August 2007. This means → gilt prices are falling hard, and holders are losing money.
Germany's 10-year Bund yield climbed 5 bps to 3.39%, the highest since 2011; French and Italian sovereign yields rose even more.
In plain terms = this is not a UK-only event — the entire European bond market is under heavy selling pressure.
Why can natural gas prices move bonds?
European natural gas prices jumped 3% on the day, breaching €74 per megawatt-hour — a new high for the year — as US-Iran tensions escalated again.
The chain: gas prices rise → European corporate energy costs climb → inflation expectations worsen → markets bet central banks must hike → bonds sell off. This reflects Europe's far greater sensitivity to gas costs compared with the US.
Brent crude, by contrast, traded around $95 a barrel, well off its year-to-date peak of $118. Stable oil prices kept US Treasuries essentially flat — Europe's losses are "its own."
How much have rate-hike expectations shifted?
The trigger: last Friday Fed Chair Kevin Warsh reaffirmed the Fed's 2% inflation target, prompting markets to price in a rate hike this month.
In Europe, traders now expect the ECB and the Bank of England to each deliver at least three more 25-basis-point hikes by mid-2027. This means → the market has abandoned the "rates have peaked" narrative and shifted to "more hikes ahead."
Put simply = weeks ago investors were betting on rate cuts; now they are betting on more increases.
What other headwinds are hitting bonds?
Fiscal deficit fears: governments keep borrowing heavily, and investors demand higher yields as compensation.
Sticky inflation: inflation is falling more slowly than expected, undermining the case for rate cuts.
Corporate bond supply shock: mega-cap tech companies are issuing debt at scale, competing with government bonds for capital. This reflects a multi-front squeeze, not a single-cause sell-off.
Heavy supply coupled with an unfavourable macro backdrop leaves limited room for a near-term rally. A move to 3.5% on the German 10-year cannot be ruled out, especially if geopolitical tensions flare again.
Francesco Maria Di Bella
Fixed-income strategist, UniCredit
(research note, Sept 2)
What does this mean for UK public finances?
Rising yields directly compress the government's fiscal headroom — borrowing costs are climbing, leaving less room to spend.
The October Autumn Budget faces mounting pressure for larger tax increases. This means → if yields fail to stabilize before the Budget, the Chancellor may be forced to announce bigger tax hikes to close the gap.
Whether gilt yields can settle before the Budget is the key marker for the direction of UK fiscal stress.
市场有风险，内容仅供研究参考，不构成投资建议。