Global bond sell-off resumes as surging oil prices stoke fears about inflation
Global government bond markets sold off sharply on Thursday after oil prices jumped 6% to above $107 a barrel, reviving fears that inflation will stay higher for longer and forcing central banks to keep interest rates elevated. The renewed turmoil, layered on top of existing worries about unsustainable government borrowing, followed reports that Houthi rebel advances along Yemen's Red Sea coast could disrupt Saudi crude exports, compounding pressure already building from the ongoing Iran conflict.
The sell-off pushed UK 10-year gilt yields above 5.37%, the highest since 2007, piling pressure on chancellor John Healey ahead of his first budget on 28 October, while petrol prices have risen 6p a litre since the start of September. In the US, 10-year yields rose to 4.92% and 30-year yields hit their highest since 2007, even after Treasury secretary Scott Bessent bought back $6bn of debt in an attempt to calm markets. The European Central Bank raised rates to 2.5%, with president Christine Lagarde warning inflation would be "longer lasting than we had anticipated", and attention now turns to the Federal Reserve's meeting next week under new chair Kevin Warsh, where markets expect a rate rise despite Donald Trump's repeated calls for cuts.
In short
- Oil surged past $107 a barrel on Middle East supply fears
- Global bond sell-off resumed, pushing UK and US borrowing costs higher
- UK gilt yields hit 5.37%, highest since 2007, ahead of Healey's budget
Steelman: both sides, in good faith
The strongest fair case each way — we don't pick a winner.
The case for
Higher oil prices threaten to feed into transport, energy and other costs, so central banks may need to keep rates high to prevent inflation becoming entrenched. Supporters of this approach argue that acting firmly now protects purchasing power over time and helps maintain confidence in monetary policy, even if borrowing costs rise.
The case against
Rate rises can deepen the pressure on households, businesses and governments already facing higher fuel costs and expensive borrowing, while doing little to increase oil supply. Critics may argue that central banks should distinguish a supply-driven price shock from persistent domestic inflation and avoid tightening so far that they unnecessarily weaken growth and public finances.
Explained simply
Government bonds are loans to governments. Their prices and yields move in opposite directions: when investors sell bonds, yields rise, which can increase the cost of government borrowing and influence interest rates across the economy.
Oil is a major input for transport, heating and industry, so a sustained rise in its price can feed into the cost of goods and services. Central banks, including the Bank of England, the US Federal Reserve and the European Central Bank, set interest rates to help keep inflation under control; higher rates can curb price rises but also make borrowing more expensive.
Investors are also weighing how much governments need to borrow and whether that borrowing is sustainable. In the UK, Chancellor John Healey is responsible for tax and spending plans, while central bank decisions affect households, businesses and government finances; in the US, President Donald Trump has called for lower rates, while the Federal Reserve makes its own decisions.
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