Back to school, back to uncertainty: Bond market jitters in the UK, US, and France

As the City shakes off the summer lull, and the kids go back to school, a chill is settling over the financial markets. There seems to be  a sense of foreboding reminiscent of September 2008, when Lehman Brothers collapsed and the world teetered on the edge of financial chaos. Today, markets are seemingly once again bracing for impact.

In the UK, political reshuffling inside Downing Street has promised momentum, but the bond markets remain sceptical. The yield on 30-year gilts has surged to 5.646%, brushing against a 27-year high . This is a clear signal that investors are demanding greater compensation for long-term risk, amid fears that the government lacks the political resolve to rein in spending. Bad news at a time when the Chancellor Rachel Reeves faces the need to fill a huge fiscal hole in her upcoming Autumn Budget. The bond market will be listening to what she says closely. As Deutsche Bank’s Chief Economist Sanjay Raja put it, “At the risk of sounding a little dramatic, the Autumn Budget will be a defining moment for the UK.”

Meanwhile, gold has soared past $3,500 an ounce. underscoring the flight to safety and amplifying investor anxiety. Across the Atlantic, political tensions are fuelling market volatility. Speculation that Donald Trump could sack Federal Reserve Chair Jerome Powell has rattled investors and drawn warnings from global leaders. Christine Lagarde, President of the European Central Bank, warned that such a move would cause “very serious” damage to the global economy. If a Trump-controlled Fed aggressively cuts rates, short-term Treasury yields might fall—but long-term yields could spike on fears of an inflationary resurgence. Already, the 30-year Treasury yield is hovering near 5%, reflecting deep unease.

In France, political instability is adding to the turmoil. A looming confidence vote could topple the government, driven by backlash against unpopular spending cuts.  Far-right leader Marine Le Pen is calling for fresh elections, and the spectre of upheaval in one of Europe’s largest economies, and primary political drivers of the EU, is unsettling investors already grappling with inflation and anaemic growth. French 30-year bond yields have hit a multi-year high of nearly 4.5%.

The ramifications of rising bond yields are profound. Higher borrowing costs for governments, businesses, and households threaten to dampen investment and consumer spending. In the UK, where the cost of living remains a political flashpoint, voters are growing increasingly restless with the status quo.

Political instability makes it harder for policymakers to implement long-term reforms or maintain fiscal discipline which will only drive-up bond yields.  Market Strategist Bill Blain often refers to a strong efficient bond market as one leg of the “Virtuous Sovereign Trinity”—alongside a stable currency and competent politics – that a country needs to be successful. If any of these falter crisis looms.

The market backdrop to Rachel Reeves’s upcoming budget couldn’t be more hostile. The message the government sends to the bond market about its fiscal strategy will be critical. As US political consultant James Carville once quipped, “I used to think if there was reincarnation, I wanted to come back as the president or the pope. But now I want to come back as the bond market. You can intimidate everybody.” 

This autumn, the UK bond market won’t just be watching—it’ll be hovering menacingly over Reeves as she delivers her budget.