Rising bond yields driven by concerns over increased US inflation
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However, recent events in the global economy have shaken up financial markets, with UK borrowing costs surging for a second day due to a global bonds sell-off. This sell-off was prompted by US producer inflation data, which showed a 0.9% month-on-month increase in July. This increase was higher than expected, stoking fears of a rise in headline consumer inflation.
The surge in US inflation, in part driven by tariffs imposed during former President Donald Trump's tenure, can have a ripple effect on economies worldwide. These tariffs contribute to higher US inflation by raising import prices, which can inflate prices elsewhere, including in the UK.
For the UK, this persistent inflation, partly influenced by global price pressures including from US tariffs, has kept UK inflation higher than in many other developed countries. This leads the Bank of England (BoE) to maintain relatively elevated interest rates (currently around 4%) to control inflation, impacting borrowing costs for the UK government and private borrowers.
Higher inflation also raises the interest payable on UK index-linked gilts (inflation-linked bonds), as these have payments tied to the Retail Prices Index (RPI). The cost of servicing government debt thus becomes more volatile and potentially more expensive when inflation rises.
Globally, higher US inflation and tariff-related trade tensions create uncertainty for monetary policy. This can lead to cautious or split decisions on US interest rates, influencing global bond yields. Elevated US inflation and trade-driven cost pressures tend to push up global bond yields, including those in other major economies, raising borrowing costs worldwide. Investors demand higher returns to compensate for inflation risk.
In summary, US inflation driven by Trump-era tariffs contributes to higher inflation expectations globally, including in the UK, pushing central banks to keep borrowing costs higher longer. This raises UK government debt interest payments and adds volatility to index-linked bonds. It also contributes to elevated global bond yields as investors price in inflation and monetary policy risks.
Yields on benchmark ten-year UK bonds climbed sharply for a second day, peaking at above 4.7%. Yields on 30-year UK bonds also climbed, reaching nearly 5.6%, the highest in nearly three months.
It's important to note that the choice of deals does not affect the editorial independence of This Money, ensuring that the information you receive is unbiased and reliable. Whether you're a seasoned investor or just starting out, understanding these global economic trends can help you make informed decisions about your investments.
- To mitigate the impact of global economic trends on investments, it may be beneficial to consider diversifying where you invest your finances.
- The current surge in US inflation, partly driven by tariffs and trade tensions, is causing a rise in global bond yields, increasing borrowing costs for various economies, including the UK.
