Long-term yields continue to rise

Bond markets around the world continued the correction that began in December, against a backdrop of sticky inflation and strong bond issuance. Although the level of US and even European long-term yields remains in familiar territory, this is not the case in the UK, where the yield on 30-year Gilts stands at 5.39%, its highest level since 1998! These levels increase the country’s financing costs. They reflect investors’ doubts about the Starmer government’s ability to reduce public deficits, given the concomitant fall in sterling in response to likely sales of UK bonds by foreign holders. In the short term, the pressure on bond markets could persist, particularly in the UK, in the absence of corrective measures and/or if inflation remains persistent. In this respect, the UK (and US) consumer prices published on 15 January will be crucial, as high inflation will limit the BoE’s room for manoeuvre.