Global bonds tumble as UK tax cuts deliver fresh headwinds

Treasuries sold off Monday to extend the worst bond slide in decades as UK tax cuts fueled concern a wave of government spending will compel global central banks to become even more hawkish.

US government debt slid across the curve and German bund futures also declined. The UK government’s package of tax cuts and regulatory reforms spurred five-year gilts to slide by the most in at least three decades on Friday after its release. Equities and other risk assets also dropped and the pound sank to a record low.

“Markets are continuing to digest the implications of the UK’s fiscal statement and the massive move in gilts,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada. Investors “are fretting over the pressure on government to deliver cost of living relief, with any loosening in fiscal settings adding pressure on central banks to do more of the heavy lifting,” she said.

Bonds and stocks are tumbling this year as the Federal Reserve leads most other central banks in a rapid shift away from the monetary policies of the pandemic, which involved keeping interest rates near zero and buying government securities to keep down yields. Government bond markets globally are on course for the worst year since 1949, when Europe was rebuilding from the ruins of World War Two, according to Bank of America Corp. strategists.

The yield on US 10-year Treasuries climbed as much as six basis points to 3.72 per cent, after five-year gilt yields jumped 51 basis points Friday. The pound dropped as much as 4.7 per cent to $1.0350, setting off declines across most major currencies against the dollar. Stock indexes fell more than 1.5 per cent in Japan, South Korea, Australia and Taiwan.

“It’s a sell everything world!” said James Wilson, a senior portfolio manager in Melbourne at Jamieson Coote Bonds. The VIX gauge of implied volatility for the S&P 500 — often called a fear gauge for stocks — may have some catching up to do with the MOVE index for Treasuries, he said.