Global bond sell-off deepens as US-Iran tensions lift inflation fears

Government bond markets came under renewed pressure on Wednesday as investors sold debt across major economies, pushing UK borrowing costs to their highest level since mid-2008. In London, the yield on 10-year UK government bonds rose to just below 5.3% in early trading. The move came as markets reacted to renewed exchanges between the United States and Iran and to a rise in oil prices.

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The sell-off has been driven by concern that higher energy costs could feed inflation and force central banks to keep interest rates elevated for longer. Brent crude was trading at about $95 a barrel amid the latest fighting in the Middle East. The United States launched new airstrikes on Iranian targets overnight, prompting counterstrikes by Tehran against American interests in Gulf allies, according to the supplied material.

The rise in gilt yields adds to pressure on the UK government's borrowing plans and on the fiscal room available to the chancellor ahead of the 28 October budget. Analysts cited in the supplied material said higher yields since the start of the Iran war may have wiped out almost half of the headroom against the government's fiscal rules. Economists at Deutsche Bank estimated that the £26bn margin created at the spring forecast could fall to less than £14bn by the time of the budget.

That matters because higher yields increase the cost of financing public debt and can narrow the choices available to ministers. The situation is particularly sensitive in the UK, where the government is already facing pressure over spending commitments and the need to fund higher defence costs. Market moves in government bonds also matter beyond Britain because they can influence borrowing conditions, inflation expectations and central-bank policy across major economies.

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The latest move followed a broader wave of selling in global bond markets in recent days, with investors also reacting to fears about inflation and spiralling deficits. The supplied material said Asian stock markets fell sharply as the sell-off resumed, with Tokyo's Nikkei 225 down 2.85%, China's CSI 300 down 1.4% and South Korea's Kospi down 3.3%. That suggests the market reaction is not confined to one country or one asset class.

What remains unclear is how long the pressure on bonds will last and whether the latest Middle East escalation will continue to drive oil prices higher. Investors will be watching for further developments in US-Iran tensions, any response from central banks, and signs of how much fiscal headroom remains before the UK budget. The next key test for markets is whether borrowing costs stay near current levels or ease if geopolitical risks subside.

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