The spotlight of the global financial market has once again shifted to the UK. The yield of UK 30-year treasury bond soared to 5.77% to 5.79%, a 28 year high since 1998; The yield of 10-year treasury bond also exceeded 5%. This steep yield curve not only indicates that the borrowing cost of the British government has climbed to the highest level in 30 years, but also gives the market a familiar taste of crisis - the haze of the "Truss shock" in 2022 seems to be coming back.

The picture shows the street view of London, UK. Source: Xinhua News Agency

In September 2022, the then British Prime Minister Truss launched a radical tax reduction plan, which triggered market panic about financial collapse and led to an epic sell-off of British treasury bond. In just a few days, the yield of 30-year treasury bond soared more than 100 basis points, once exceeding 5%. The British pension system was on the verge of explosion, which eventually forced the Bank of England to launch an emergency bond purchase plan to "fight the fire", and Truss also stepped down.

Now, as long-term bond yields approach or even surpass the "death line" of the past, the market is concerned whether history will repeat itself in 2026? Why has Britain become the 'eye of the storm'?

Recently, the situation in the Middle East has remained tense, and shipping risks in the Strait of Hormuz have increased, driving severe fluctuations in international oil and natural gas prices. As a net importer of energy, the UK is extremely sensitive to external energy prices. The latest data shows that the inflation rate in the UK unexpectedly jumped to 3.3% in March, far exceeding the Bank of England's target of 2%. The slowdown in inflation has directly led to the market completely abandoning the expectation of the Bank of England's recent interest rate cuts and instead betting that it may maintain high interest rates or even restart rate hikes within the year.

At the same time, according to market estimates, the UK government may issue up to 250 billion pounds of treasury bond bonds in fiscal year 2026. Against the backdrop of slowing economic growth, such a huge financing demand has exacerbated the supply-demand imbalance.

But currently, the support rate of the ruling party in the UK is low, and the government is struggling to swing between reducing welfare, increasing taxes, and maintaining public services. This policy hesitation further weakens market confidence.

Kathleen B. Neas, Chief European Economist at PGIM Fixed Income, analyzed that "the mismatch between fiscal and growth paths, high vulnerability to energy shocks, and political uncertainty are reinforcing each other, pushing the UK to the forefront of the storm

Although the UK is seen as the most vulnerable link at present, bond market turbulence is not an isolated case. In fact, the long-term interest rates of major economies around the world are undergoing a synchronous upward trend.

The US 30-year Treasury bond yield has re-approached the psychological threshold of 5%, and the 10-year yield has remained at a high of 4.4; the Japanese 10-year Treasury bond yield has risen to a rare high of around 2.5; and the German 10-year Treasury bond yield has also risen sharply from the historical low of negative 0.7 in 2019 to near 3.0.

Analysts pointed out that the collective "outbreak" of global long-term interest rates marks the complete end of the era of low interest rates. This shift in the macro context will have a profound impact on global asset pricing. As long-term interest rates rise and the discounted value of future cash flows declines, valuation bubbles in highly valued growth assets are at serious risk of being squeezed.

At present, although the Bank of England has not been forced to intervene as it did in 2022, and the pound exchange rate has still appreciated during the year, indicating that international capital has not yet completely withdrawn, if the situation in the Middle East causes oil prices to continue to rise, or if the UK's domestic fiscal policy shows signs of loosening, the UK bond market is likely to once again become the most vulnerable link in the global financial market, when the global capital market may usher in a new round of violent shocks. (Comprehensive Global Network Financial Times Network report)