Global bond sell-off resumes as surging oil prices stoke fears about inflation

Surging oil prices caused by intensifying tensions in the Middle East have fuelled inflation concerns across markets including South Korea. Photograph: YONHAP/EPAView image in fullscreenSurging oil prices caused by intensifying tensions in the Middle East have fuelled inflation concerns across markets including South Korea. Photograph: YONHAP/EPABondsGlobal bond sell-off resumes as surging oil prices stoke fears about inflationCrude jumps above $107 a barrel amid concerns over Middle East conflict and out-of-control government borrowing

Nervous investors across big economies have been dumping government bonds, driving up the cost of borrowing, as surging oil prices amplified fears about rising inflation.

The cost of a barrel of oil jumped 6% to above $107 on Thursday amid concerns that advances by Houthi rebels along the Red Sea coast in Yemen could choke off Saudi crude exports.

The global bond sell-off that has rocked markets in recent weeks resumed in response to the news from the Middle East – which came against a backdrop of escalating concern about out-of-control government borrowing.

Higher oil prices, which had already climbed since hostilities resumed in the Iran war, are expected to drive up inflation, prompting central banks to raise interest rates and putting the brakes on economic growth.

Donald Trump suggested on Wednesday that the conflict with Iran could continue until “immediately after” November’s US midterm elections, at which point he claimed oil prices would be “tumbling downward”.

The European Central Bank (ECB) raised its main interest rate to 2.5% on Thursday, with its president, Christine Lagarde, saying: “We believe inflation will be longer lasting than we had anticipated.”

“The conflict in the Middle ​East continues ​to ⁠generate inflation pressures, and inflation is set to ​remain well above target for ​an ⁠extended period,” she added.

View image in fullscreenThe ECB president, Christine Lagarde, said eurozone inflation would remain above the central bank’s target for longer than expected. Photograph: Filip Singer/EPAAs Thursday’s sell-off gathered pace in London, the yield, or interest rate, on 10-year UK government bonds surged above 5.37% – the highest cost of borrowing since 2007 – creating a fresh headache for the new chancellor, John Healey.

With less than seven weeks to go until Healey’s first budget on 28 October, higher interest rates on the UK’s debt-pile will raise the cost of future investment projects and eat into the Treasury’s fiscal headroom.

At the same time, the prospect of higher energy bills as oil and gas prices rise is likely to intensify pressure on the government to help consumers to weather the winter.

Unleaded petrol prices have already risen by 6p a litre since the start of September, according to the motoring organisation the RAC, while the prospect of higher inflation has prompted some banks to raise their mortgage rates.