France’s 30-year government bond yields surged to their highest level in over 16 years. The interest rate on Britain’s 30-year bonds, known as gilts, reached 5.72pc, the highest since 1998.
US Treasury yields also jumped, amid fears that the Supreme Court may reverse president Donald Trump’s tariffs and because of his meddling with the Federal Reserve.
The sell-off in government bonds spilled into the equity markets, which were uniformly down. The Iseq in Dublin fell by 1.5pc, the FTSE 100 in the UK fell by almost 0.9pc, while Germany’s Dax was down 2.2pc.
The price of gold, a traditional safe haven during market turbulence, rose again, reaching $3,508.50 per ounce early yesterday, continuing its strong upward trend this year.
Stephen Grissing, a director and investment strategist at Davy, said: “Equity markets down, gold higher, while bond yields move higher and bond prices go lower makes for quite an unusual day in itself. It all points to concerns over fiscal discipline in government.”
He said that looking at the G-10 – the 10 core developed-market currencies – there were some signs of a contagious effect, as investors digested grim economic data from a number of sources.
“G-10 yields are up across the board, there is no region that isn’t,” Mr Grissing said. “There is a bit of contagion there in the short term. I think everyone is scrambling.”
Justin Doyle, a treasury analyst with Investec, said: “The French and UK situations are similar – they have fiscal black holes to fill. Markets are really not happy about that. There’s always the risk of contagion. When you get two big economies starting to feel the pain, that contagion will spread.
“From a US perspective, markets really don’t like the relentless attacks on the Federal Reserve. If Trump does oust Lisa Cook [a governor], that may be a bridge too far for markets.”
Mr Doyle said the European Central Bank (ECB) could step in at some point, in the same way it did during the financial crisis, when it bought Irish, Greek and Portuguese bonds, which proved effective in calming the markets.
“I don’t think we’re near that yet, it’s just a bit of market nervousness,” he said. “Equity indices – in particular US, but also European – have had a good run over the last few month. A slight correction is not going to dismay anyone.
“From a European perspective, is the ECB concerned? Probably not. But they will be keeping an eye certainly on France. They don’t want the second largest European economy’s bond levels to blow out. They have the arsenal to go in and protect against any scary moves.”
On the foreign exchange markets, both the dollar and the euro gained against sterling. The euro reached 0.87p against sterling, its highest level in almost a month. The pound fell more than 1pc against the dollar.
“We have more of a cautious view on sterling than we would have on the euro currency,” Mr Grissing said. “The UK government is trying to stimulate growth, but it’s not happening, and the cost of borrowing going up is reducing the fiscal head space that is there. They have crucial months ahead.”
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