Bond yields surge, as political and fiscal woes start to bite, and gold hits a new high
By Kathleen Brooks, research director at XTB
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Create account Try a demo Download mobile app Download mobile app- Bond yields surge, but UK is no outlier for now, but pound tanks
- Stocks slip, as the ‘September effect’ gets into full swing
- The gold price reaches a record, as safe havens surge
- FTSE 100 given some protection by surging gold mining shares
Market sentiment is slipping on Tuesday. September can be a strange month for financial markets, as stocks historically tend to underperform. However, a selloff in the bond market and a rush to the dollar and gold are signs that investors are rushing into safe havens and liquid assets as we move through the week.
UK 30-year yields are surging this morning and are back at their highest level since 1998. This is weighing heavily on the pound, which is the weakest performer in the G10 FX space on Tuesday and is lower by more than 1% vs. the USD. The key driver of weakness in the bond market could be a delayed reaction to the Government reshuffle on Monday. The Prime Minister beefed up his economic team in the lead up to the budget. This has not gone down too well, with concerns that there is still a strategy void when it comes to the economy, as the government struggles to deliver the growth that it promised, at the same time as borrowing surges.
Future of Chancellor weighs on UK bonds
There could also be some concern that Chancellor Rachel Reeves is being ‘managed out’. The last time there was a threat to Reeves’ position, back in early July, bond yields jumped as the market worried that she could be replaced by a more left-leaning member of the Labour party.
UK not an outlier for now
Right now, the UK is not an outlier as European bond yields are also moving higher, and there has been a hefty uptick in European yields on Tuesday. A rise in UK yields always garner more attention, because our yields are at a higher level to begin with. However, if UK yields continue to rise, and if they start to rise at a faster rate than elsewhere, then it could be a sign the market is pricing in a growing probability that Rachel Reeves will throw away her fiscal rules and borrow more at the Budget to fund spending, rather than increase taxes and stymie growth.
As we lead up to the Budget, the Chancellor’s options are narrowing, and we could see more frequent bursts of bond market volatility. While we are not quite at Liz Truss levels of stress in the UK bond market, the ‘Starmer Moment’ for markets could be coming down the line.
French political concerns weigh on Europe’s bond market
10-year yields are also rising sharply across Europe. For now, UK 10-year yields are rising at a slower pace than other European yields including France. A political crisis is threatening to collapse the French government, yet again, as we lead up to next week’s critical confidence vote in the government. The Prime Minister said on Monday that there is a high chance that talks could fail and he could lose the vote. Political woes and high budget deficits is like kryptonite for the bond market right now, which leaves France on bond investors’ radars.
Dollar shows its safe haven credentials
The dollar is the top performer in the G10 FX space on Tuesday, as investors rush to the world’s most liquid asset. The yen, usually considered a haven, is also lagging and is the second worst performer in the G10. High levels of public debt plus political troubles, a key member of Japan’s ruling party has announced his resignation this morning which could destabilize the government, is bad news for a currency, which is why the yen is also under pressure on Tuesday.
All that glitters…
Another main market mover this morning is gold, which hit an intra-day record high of $3,508, although it has slipped back from this level as we move through the European open and is currently trading around $3,480.
There are multiple drivers of the gold price right now: 1, concerns around Fed independence, 2, expectations of steep rate cuts in the US even though inflation is running ahead of target, 3, political risk and government indebtedness, and 3, momentum. Momentum has been a key driver of global markets so far this year. It is one of the top three drivers of US stock indices, and it is also helping the gold price to outperform global stocks, the gold price is higher by 32% so far in 2025, vs. 9% gains for the S&P 500 and the Eurostoxx 50 index.
The allure of gold is unlikely to be dimmed in the near term. Another reason for the surge to record highs today is concerns about how Donald Trump will react to a weak payrolls report on Friday. The market is expecting another sub-100k reading, which could ignite the ire of President Trump, who fired the head of the BLS after last month’s report, which also contained downward revisions. The gold price is the most reliable harbour in this current storm, and life above $3,500 could soon become a reality.
Global stock indices are a sea of red this morning, the FTSE 100 is down 0.5%, the Dax is lower by more than 1%. The FTSE 100 is benefitting from the rise in the gold price, and miner Fresnillo is leading the FTSE 100 today and is higher by 0.7%.
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