26/09/2026 by Tony Redondo
The global bond sell-off has pushed long-term borrowing costs to highs not seen in decades, and this time it’s not a mystery why. A protracted conflict in the Middle East has kept oil and gas prices elevated and volatile, and that energy shock is now working its way through inflation prints and rate expectations on both sides of the Atlantic. The question markets are asking is whether something breaks under the strain.
The numbers are ugly regardless of cause. Global debt now sits above $365 trillion, roughly three times global GDP and governments are locking themselves into what looks increasingly like a vicious cycle: short-term fixes papering over long-term vulnerability.
Start with the US, because that’s where this leg of the move is being driven from. Ten-year Treasury yields blew through 5.2 per cent this week, their highest since 2007. Thirty-year yields cleared 5.5 per cent, a level not seen since 2004. That’s the biggest one-day sell-off in the Treasury market since Trump’s trade war kicked off, and it’s on course to be the worst month for Treasuries since late 2024.
Here’s the bit that should worry anyone hoping higher rates would slow things down: they haven’t. Business activity in the US accelerated to its fastest pace in five years in September, per the S&P Global PMI, and the Atlanta Fed’s GDPNow tracker has the economy running at an annualised 5.1% for Q3. Fidelity’s Mike Riddell summed up the mood among big bond investors bluntly. Asked if yields had reached the point where they’d finally bite, his answer was “we’re not even close.”
The Fed raised rates this month for the first time since 2023, and the tone since has been hawkish. Fed board members Barr, Kashkari and Collins have all signalled more rises could be coming. The market’s now pricing another 0.9 percentage points of hikes over the next year, up from just 0.6 points before the September meeting. Core PCE inflation is still running at 3.7%, above target since 2021. The 30-year mortgage rate has hit 7% for the first time in almost two years, so households are feeling it even if headline growth isn’t.
Worth flagging: PGIM’s Robert Tipp reckons the US economy is “relatively insensitive” to rate rises this cycle because it’s unusually asset-rich and cash-rich. That’s a real argument, but it’s also precisely the kind of thing that gets said right up until it stops being true. Asset-rich helps you if you’re the third of households sitting on equities and property gains but does nothing for the majority servicing variable debt or renewing a mortgage at 7%. I’d treat “this time it’s different” as a hypothesis, not a conclusion.
Now to the UK and we’re not spectators here, we’re getting dragged along by the same current, with our own mess layered on top.
The UK benchmark 10-year Gilt (bond) yield broke above 5.39% on Thursday, the highest since April 2007, just before the financial crisis. That leaves Chancellor Healey staring down tax rises or spending cuts at a Budget now under five weeks away, on 28 October. Top four accountants KPMG reckons his fiscal headroom will nearly halve before then, down to roughly £12bn from £23.6bn at the spring forecast; about £9bn of that wiped out by higher debt-servicing costs alone, with weaker growth eating most of the rest. The OBR may well downgrade its forecasts too, which could strip out another £2bn.
KPMG expects the Bank of England to lift Bank Rate from 3.75% to 4% in November, with cuts not resuming until next summer once the energy-driven inflation spike fades. That’s a call worth stress-testing rather than banking. August borrowing already came in £3.5bn above the OBR’s prediction, and if growth keeps softening into Q4 while cost-of-living support gets bolted on, the case for holding rates higher for longer only strengthens. A November cut looks like the less likely outcome to me, not the more likely one.
Gilt yields have climbed around 1.3% since Labour took office in July 2024, and annual debt-interest costs are now running at roughly £200bn, nearly matching the entire day-to-day health and social care budget of £204bn.
Against the other big departmental budgets, it’s not close:
Defence: ~£39bn. Debt interest is over five times the entire defence budget.
Education: ~£90–95bn. Debt interest is more than double what’s spent on schools and skills nationally.
Health and social care: ~£204bn. Interest costs have essentially caught up with the NHS.
For context on scale, total day-to-day departmental spending across every government function was £512bn in 2025/26. Debt interest alone is eating up nearly 40% of that. Money that generates precisely nothing in return. No hospitals, no schools, no ships. Just the cost of past decisions.
And this is not a revenue problem. August tax receipts hit £68.8bn, a record for the month, with £962.6bn collected over the year to August. Spending is simply growing faster than income and nobody serious thinks the potholes are getting fixed or NHS waiting lists are shrinking as a result.
Lord Jim O’Neill, the former Goldman Sachs man who advised Andy Burnham before he replaced Sir Keir Starmer read is the sharpest one going, debt-servicing costs are “increasingly crazy,” roughly £77bn of borrowing since April is not sustainable in his words, and Western governments went big in 2008, went bigger after Covid, and have done almost nothing to correct course since.
O’Neill wants the triple lock scrapped. He’s also against a capital gains tax hike, calling it “risky business” that could choke off business investment, and he took a swipe at Burnham’s “growth in every postcode” line, calling it a recipe for wasted taxpayer money. His alternative: get 10-year gilt yields down 150 basis points (1.5%) and you’ll see it show up in mortgage rates everywhere.
I don’t disagree with the diagnosis. I’d push back a little on his prescription of getting gilt yields down 1.5% by fiat isn’t something a Chancellor can simply will into being when the driver is a global energy shock and a Fed that’s still hiking. You fix the fiscal position first; the yields follow, not the other way round.
UK Gilt Crisis – Why Rising Bond Yields Signal a Sterling Crash Is Coming – Cosmos Currency Exchange
IMF chief Kristalina Georgieva put it plainly to the BBC. Governments need the courage to make the politically difficult calls on debt. Fine sentiment. The question for 28 October is whether Healey actually has the economic and political room to make one.
Currency Exchange Rates Update
It’s been a rough week for the Pound, down against every G10 currency bar the Australian and Canadian dollars.
The biggest losses have come against the US dollar: down 1.1% on the week and over 2.5% on the month, reflecting surging global yields, softer risk sentiment and renewed dollar demand since the hawkish Fed hike.
The domestic backdrop hasn’t helped. Three themes stand out. First, markets are increasingly pricing in an aggressive Bank of England tightening path. Second, labour market conditions are cooling. Third, elevated energy prices threaten another squeeze on real incomes heading into winter.
The first two showed up clearly in this week’s PMI data. The UK composite PMI slipped to a three-month low of 51.7, missing expectations and marking one of the first meaningful downside surprises after a prolonged run of positive UK data. Eurozone activity, by contrast, kept improving, with the Pound to Euro exchange rate breaking below its 100-day moving average for the first time in several months.
Deutsche Bank has already recommended selling the Pound this week against a basket including the euro, citing the disappearance of the risk premium around UK fiscal policy. On the euro side, markets price roughly a 50% chance of an ECB rate rise in October, with a December increase more than fully priced in.
HSBC expects the Pound to underperform in the coming months, for three reasons:
- Markets are already priced for hikes from a Bank of England.
- Labour demand is weak.
- Another real income squeeze follows if energy prices stay elevated.
The first two showed up in Wednesday’s business surveys. Pantheon Macroeconomics reads them as consistent with payrolls falling by 4,000 in September; Berenberg notes they extend a two-year decline in UK employment.
Looking ahead, the outlook for the Pound doesn’t look bright with economic growth likely to soften into year-end as higher energy costs, a deteriorating trade backdrop and shrinking fiscal headroom weigh on activity.
Bank of England Governor Andrew Bailey has become the third member of the Monetary Policy Committee in 24 hours to strike a hawkish tone on the UK’s rate path. Speaking at a conference at Oxford University, he said persistently high oil and gas prices would make it harder to leave rates on hold and that policymakers couldn’t afford to wait to see precisely how those extra costs were feeding into inflation before acting.
Bailey’s warning follows similar shifts in tone from deputy governors Clare Lombardelli and Sarah Breeden this week.
The trio voted with the six-three majority to hold the base rate at 3.75% when the nine-member panel met earlier this month. If they take a more hawkish stance at the committee’s next meeting on 5 November, the balance tips decisively the other way.
What’s in the news?
Chancellor John Healey and Prime Minister Andy Burnham could raise £26bn by hiking capital gains tax and extending national insurance to other forms of income according to a plan from academics that will rattle both the City and Westminster ahead of this year’s Budget.
Researchers at Centax (the Centre for Analysis of Taxation), a mix of LSE and Warwick academics argue the £26bn package would correct the imbalance between what salaried employees pay and what the very highest earners hand over, given their income often comes from elsewhere. Expect a proper row in Westminster: a smaller fiscal headroom may force Healey’s hand on tax rises, and Labour’s manifesto pledged no increases to income tax, VAT or national insurance for workers. Something has to give.
Not everyone’s convinced it will raise a penny. Andy Burnham’s former economic advisers Jim O’Neill and Andy Haldane, the ex-Bank of England chief economist, now President of the British Chambers of Commerce warn that capital gains and investment tax changes could actually shrink revenue as investors change behaviour. Paul Johnson, former head of the IFS, went further, calling the claims that it would boost receipts “nonsensical”. His estimate is a £3.5bn loss, not a gain. Robert Salter at Blick Rothenberg reckons extending NICs to self-employed partners “could be quite controversial,” while his colleague Sean Drury, the firm’s head of tax, says the changes would leave the UK less competitive than other major economies.
The business community isn’t keen either. Research commissioned by S&W found 60% of 500 business owners, spanning turnovers from £5mn to £500mn-plus would reconsider starting a new business if CGT went up, and 54% said they’d consider moving overseas if taxes rose further. That’s not a fringe reaction. That’s established business owners as well as entrepreneurs getting nervous.
Tax uncertainty ‘keeping clients awake at night’ – FTAdviser
Even the OBR is sounding the alarm. Professor David Miles, one of three members on the independent fiscal watchdog, warned that further tax rises could cost the economy more than the Treasury gains and could reshape public expectations of what the state can actually deliver.
UK
The Times revealed that more than half of Labour MPs have more disability benefit claimants in their constituency than their electoral majority. Some 58% of Labour’s 366 seats in England and Wales have more people claiming Personal Independence Payments (PIP) than the sitting MP’s majority, Pat McFadden, the Secretary of State for Work and Pensions, among them. More than 100 Labour MPs have more constituents claiming PIP for mental health conditions alone than their majorities.
A major new YouGov seat-by-seat poll points to a hung parliament, with Reform falling behind both Labour and the Conservatives. YouGov’s MRP model projects Labour as the largest party on 241 seats, the Conservatives on 130, and Reform UK on 123, a sharp reversal from last September’s model, which had Reform on 311, just 15 short of a majority. No party comes close to the 326 seats needed to govern alone: Labour would be 85 short, and both the Conservatives and Reform would need support from others to command the Commons. The Liberal Democrats are projected on 71, the SNP on 40, Plaid Cymru on 15 and the Greens on nine. YouGov’s central estimate draws on nearly 17,000 respondents surveyed between 23 August and 18 September, a snapshot of current opinion, not a prediction of the eventual result.
Ofcom stands accused of burying data showing GB News is more trusted by its viewers than the BBC is by its own. The regulator’s latest news consumption survey found GB News viewers rate the channel more highly for trustworthiness than viewers of the BBC, Sky News, ITV or Channel 4 rate theirs. GB News viewers also ranked it top for range of viewpoints, and joint-first with Sky for impartiality. In previous years Ofcom has published these figures alongside a press release summarising the findings. This year, they were quietly omitted, surfacing only after GB News requested them. Cue accusations that Ofcom deliberately played down the scale of GB News’s popularity.
An Ofcom spokesman said an administrative error caused a short delay in publishing the underlying data, “which we corrected as soon as we became aware.”
Good news
Consumer confidence rose again this month, the best run of optimism British households have seen in two years. GfK’s closely watched sentiment survey climbed a point to minus 13 in September, the third straight month of improvement.
The UK’s legal sector exports hit a record £11bn. London is driving that charge. Overseas exports from British legal services have surged 60% over the past five years to hit almost £11bn, according to new data from the Law Society, which represents 178,000 practising solicitors in England and Wales. London “remains an international heavyweight” in legal services exports, the Society says and the numbers back it up: 96% of the caseload handled by the London Court of International Arbitration involved at least one non-UK party, “pointing to London’s international appeal.”
HSBC is creating 1,000 entry-level roles in the UK over the next year, apprenticeships and graduate programmes, starting by the end of this month, off the back of a global restructuring under chief executive Georges Elhedery, aimed at stripping out £1.1bn in costs, cutting duplicate senior roles and reducing managing director headcount by 15%.
Bentley has committed £350m to build its first fully electric model, the Torcal, at Crewe. That’s part of a £1.02bn week for UK automotive investment, alongside fresh commitments from McLaren and Nissan, a decent show of confidence in British car manufacturing.
Not so good news
The OECD has cut its UK growth forecast for 2027 from 1.1% to 1%, blaming the Middle East conflict, which has pushed global oil and gas prices higher. The OECD’s message to the Treasury is blunt. Rising borrowing costs mean spending needs reining in, public sector efficiency needs improving, and revenues need strengthening. On rates, though, the Paris-based group reckons the Bank of England has done enough and that monetary policy is tight enough to keep inflation under control, with just a quarter-point cut pencilled in for Q3 2027.
Britain’s food and drink trade deficit came in at £21.1 billion for the first half of the year, the worst since the turn of the century, according to the Food and Drink Federation, which called it a “wake-up call” for government. Export volumes fell over 10% between January and June, with food exports of 4 billion kilograms only marginally ahead of pandemic-era lows.
The British Retail Consortium’s confidence index dropped to -34 in September, down from -28 in August, snapping four months of improvement. Households are increasingly worried about their finances and reluctant to spend, with Budget tax speculation adding fuel to the fire as economists flag a deteriorating fiscal position.
Thousands of jobs are on the line after Ineos suspended operations at three major UK chemicals plants. Jim Ratcliffe didn’t hold back, taking aim at what he called “ridiculously high” UK energy prices. The plants, which supply raw materials for pharmaceuticals, clothing, cosmetics, detergents, construction and military explosives support almost 4,000 highly skilled jobs in Humberside.
Ratcliffe’s words: gas prices in the UK are 12 times US levels and 8 times China’s and Ineos simply can’t compete. He called it “economic vandalism on an industrial scale” with jobs exported to China and the US, and global CO2 emissions driven up in the process, given replacement supply comes with double the carbon footprint from America and eight times the footprint from China.
Essential costs (transport, housing, energy) are outpacing income growth according to the Asda Income Tracker which shows essential household costs up 3.9% year-on-year in August, against income growth of 3.8%. Spending power growth slowed to 3.4% in August, its weakest since March.
Britons are feeling the most insecure about their jobs since February 2023, per the latest S&P Global UK consumer index. Every sector bar IT and telecoms reported declining confidence in September. Retail workers are the most anxious, squeezed by higher employment costs, softer demand, and supply-chain disruption tied to the Iran war.
USA
Manufacturing is roaring. The latest survey showed the sharpest jump in activity since early 2015, with input costs, mainly fuel and transport rising at their fastest clip in four years. Good news, in theory.
Except nobody told the American consumer. The University of Michigan’s sentiment index dropped from 51.7 in August to 48.1 in September and the public’s inflation nerves are fraying. One-year inflation expectations jumped from 4% to 4.6%, with longer-term expectations creeping up too. That’s not noise, it’s consumers telling you they think price rises are sticking around.
Bond markets agree. Rising 5- and 10-year Treasury yields suggest investors reckon the Fed will need another hike to keep a lid on inflation. The next FOMC meeting is 28 October, a week before the midterms. Timing doesn’t get much sharper than that.
Equities have shrugged it off, for now. Wall Street closed out a choppy week with gains: the S&P 500 up 0.51% to 7,743.41, the Nasdaq up 0.5% to 27,068.72, and the Dow adding 478.64 points (0.93%) to 51,828.62. Weekly totals: Dow +0.3%, S&P +1.2%, Nasdaq +2%.
Eric Diton of The Wealth Alliance flagged that bearish sentiment has picked up sharply over the past fortnight even as the market itself stays “incredibly resilient” with both major indices sitting roughly 1% off their all-time record highs. His caveat is the one worth remembering: if yields keep climbing, markets won’t stay this relaxed indefinitely.
Worth stress-testing: resilience so far doesn’t mean resilience continues. Rising yields plus rising inflation expectations plus a Fed under pressure to act before an election is not obviously a “buy the dip” backdrop but a set-up. Anyone treating current calm as a green light should be asking what breaks first if the 28 October meeting delivers a hawkish surprise.
Trump’s approval hits a second-term low. Net approval fell to -21.1 on Wednesday, matching his first-term low from December 2017, before ticking up marginally to -20.9 (38.8% approve, 59.7% disapprove, per RealClearPolitics). For context, Obama and Bush were both still in positive territory at the equivalent point in their second terms, 41.5% and 41.3% respectively. This is a different picture entirely.
The generic congressional ballot has moved with it: Democrats now lead by 8.7 points, their best showing of the cycle, and Polymarket has them at a 93% chance of retaking the House. That lead is bigger than either party has held at this stage of any midterm cycle since 2010. The nearest comparison is 2018, when Democrats led by 7.8 points on 24 September and went on to win by 8.4, picking up 41 seats.
History isn’t kind to the incumbent party from here. Obama-era Republicans gained 26 seats in 2010; Bush-era Democrats picked up 31 in 2006, flipping the House.
Washington is putting money behind its de-risking-from-China strategy: up to $7 billion in loans to Argentina for energy and critical minerals, with Buenos Aires targeting a fivefold increase in lithium exports over the next decade. Read it as part of a broader push to pull Latin America’s resource base away from Beijing.
Separately, the US, Denmark and Greenland signed a defence pact this week with two new US military areas, extended access to Greenland’s airspace and waters (submarines included), and a ban on any non-NATO presence on the island. Danish sovereignty and Greenlandic self-governance are both explicitly reaffirmed. Still needs sign-off from Greenland’s parliament.
New York has filled its 200,000th pothole of the year, running at roughly 3,000 a week, and just posted its safest summer on record: 195 shootings and 66 murders between June and August, both all-time lows, with major crime down 6.2% over an eight-month stretch.
The EU
Eurozone sentiment indicators continue to surprise to the upside, highlighting economic resilience despite geopolitical tensions and domestic political uncertainty. Alongside this week’s S&P PMIs, yesterday’s German Ifo survey added further evidence of solid underlying momentum.
The headline Ifo business climate index rose for a fifth consecutive month, from 88.8 (est. 89.0) to 89.9. The current assessment component increased from 88.5 (est. 89.0) to 89.5, while expectations climbed from 89.1 (est. 89.3) to 90.4. Much of the strength likely reflects the government’s sizeable fiscal stimulus on defence and infrastructure is finally starting to filter through to the economy and offset some of the drag from higher energy prices.
Alliance for the Future, the catchy name for what EU Commissioner Ursula von der Leyen unveiled last week as the path beyond CETA between the EU and Canada. CETA, the Comprehensive Economic and Trade Agreement was signed in 2016 and came into provisional effect in 2017, despite ten EU countries never ratifying it: Belgium, Bulgaria, Cyprus, France, Greece, Hungary, Ireland, Italy, Poland and Slovenia, all citing food safety and environmental standards. There’s no timetable for ratification in any of them, so the process is effectively dead. In France, for instance, the Senate rejected it outright, so the government shelved the bill rather than risk the National Assembly rejecting it too.
German Chancellor Friedrich Merz’s CDU has just suffered the worst defeat in its history, failing to win a single seat in the Mecklenburg-Vorpommern state election as the AfD took 38.2% of the vote to the Chancellor’s party’s 4.9%. Under Germany’s 5% threshold rule, that’s not just a bad result, it’s the first time the CDU has failed to enter a state parliament at all.
It is now costing France more to borrow than Greece, 4.5% versus 4.28%. France is twelve times the size of Greece, richer and more diversified, but that’s not the whole story. Markets are pricing France on its appetite and political ability to cut debt, the trajectory of that debt, and how often it needs refinancing. On every one of those measures Greece scores better and has form. It took austerity to a scale unimaginable in France when it bit the bullet in 2012 and borrowed long. The upshot: France’s debt mountain keeps growing, and the premium markets demand to refinance it will keep rising with it.
Australia
August’s labour market report threw up a surprise. Employment jumped 39,000, well above expectations but the unemployment rate rose in tandem. A mixed signal, not a clean one.
RBA Governor Michelle Bullock used a CEDA fireside chat in Sydney to hammer the inflation message home. Her line: price pressures remain too high, and repeated global supply shocks could keep them elevated for longer than markets are pricing in. She went further, suggesting unemployment may need to drift up towards 4.5–5% to take the heat out of excess demand. Read that as a central bank signalling it’s prepared to tolerate a weaker labour market to get inflation back in its box.
Put together, the message is clear enough. Australian rates look set to stay higher for longer.
Then came the Intergenerational Report, and it’s not cheerful reading. Growth is projected to slow to an average 2.0% a year over the next four decades, down from the historical 3.0% as an ageing population and falling birth rates bite. Worse, the productivity assumptions lean heavily on AI adoption picking up the slack. That’s a big bet to build four decades of forecasting on.
Meanwhile, markets and lenders are bracing for the next RBA board meeting. With inflation still stuck above the 2–3% target band and running at an 3.5% annualised, the odds of a rate rise or at least a long stretch of high rates, remain elevated. Mortgage holders shouldn’t expect relief any time soon.
Canada
Carney’s flirting with Brussels, meeting Macron on French soil barely off Newfoundland, then pitching Canada as an EU “associate member” before Strasbourg. Fine theatre, but the substance isn’t there. Canada and the EU still haven’t finished ratifying CETA after eight years, and ten member states haven’t signed off. Carney doesn’t actually want deep integration anyway but a looser “alliance for the future” with Britain and Australia in tow. Trouble is Burnham’s fighting off Farage and Albanese’s ratings are sliding so neither has the capital to commit long-term.
Meanwhile: Washington’s eyeing Belarusian potash as an alternative to Saskatchewan, which still supplies roughly 80% of US agricultural potash but Canada’s not panicking. Consumer weakness too, with July retail sales volumes down 1.1% in real terms. And Volkswagen’s just pushed its Ontario battery plant back to 2029, another supply-chain promise slipping.
Others
China’s Pinglu Canal. Nanning to the Gulf of Tonkin, 83 miles, £8.1bn, four years to dig. The Pinglu Canal opened this week, and Beijing is calling it the “project of our century”, not modest, but not wrong either. It’s the first river-to-sea waterway China has built since 1949, and it does something concrete: it cuts the journey from Guangxi’s inland river systems to open water by up to 350 miles, saving roughly 28 hours per cargo run and, on Beijing’s own numbers, around 30% off logistics costs according to the Chinese state broadcaster, north of £570m a year in savings once it’s running at scale.
The engineering is the real story. Roughly 339 million cubic metres of earth moved, three times the volume shifted for the Three Gorges Dam. Vessels up to 5,000 tonnes can now run bulk coal, ore, grain and chemicals straight out to sea rather than round through Guangzhou. That’s a genuine structural shift in how China’s less-developed interior of Sichuan, Chongqing, and Yunnan connecting them to Southeast Asian trade.
It didn’t come free. Thousands of families across Guangxi and Hengzhou were relocated off ancestral land. Compensation, new housing, training and promises of construction work were the trade-off.
Strategically, the timing isn’t an accident. China-ASEAN trade passed $860bn in the first eight months of 2026, up 25.6% year-on-year, and Beijing is leaning hard into that relationship while Western supply lines through West Asia stay rattled. This canal is as much a hedge against Hormuz-adjacent disruption as it is a domestic infrastructure win.
And the Gulf isn’t sitting still either. The Iran war knocked confidence in the region’s tech and logistics ambitions. AWS still hasn’t restored one of its three UAE availability zones or its Bahrain network, but the capital keeps flowing. Microsoft’s putting at least $10bn into Gulf data centres and subsea/overland cabling by 2030, deepening ties with G42 and HUMAIN.
The UAE has stood up a freight rail link from Fujairah to Abu Dhabi. Three services a week, 200km, specifically to route around the Strait of Hormuz.
Saudi Arabia’s ordered 780 railcars from Greenbrier and ploughed $1.46bn into ports since the war began. Jeddah’s truck traffic has gone from roughly 2,500 a day to over 10,000, essentially absorbing volume that would normally transit Hormuz.
Dubai’s approved a fourth Sharjah–Abu Dhabi highway corridor, cutting journey times by up to 60%, one more entry in a building spree that includes the $35bn Al Maktoum airport and Emaar’s $54bn “city within a city.”
Stranger than fiction
A UK startup is making toothpaste out of human hair. Eterna Regeneratives is turning keratin, a protein sourced from human hair or sheep’s wool into a toothpaste that repairs damaged tooth enamel. The company says the formulation would be more effective than fluoride.
Quote
Jamie Dimon, CEO of JPMorgan Chase, “Capitalism shouldn’t be judged by perfection, but against the alternatives.”