Global bond selloff resumes as surging oil prices stoke fears about inflation

• Oil prices jumped 6% above $107 amid fears that conflict along Yemen's Red Sea coast could disrupt Saudi crude exports, with unleaded petrol in the UK already up 6p per litre since early September
• UK Chancellor John Healey faces reduced fiscal headroom with just seven weeks until his October 28 budget, as higher borrowing costs will increase debt servicing and investment project expenses
• ECB President Christine Lagarde warned inflation will remain 'well above target for an extended period' due to Middle East conflict, while the US Treasury's $6bn bond buyback failed to calm markets

Summary: Global Bond Selloff Resumes Amid Oil Price Surge and Inflation Concerns

Key Market Developments:

Global bond markets experienced renewed selling pressure as oil prices surged 6% to above $107 per barrel on Thursday, driven by Middle East tensions involving hostilities along Yemen's Red Sea coast that threatened Saudi crude exports. The spike intensified inflation fears and raised concerns about central bank policy responses.

Major Impact Points:

• UK 10-year government bond yields jumped above 5.37%, the highest since 2007, creating fiscal challenges for Chancellor John Healey ahead of his October 28 budget
• US 10-year yields climbed to 4.92% (highest since 2023), while 30-year yields reached 2007 levels
• UK petrol prices rose 6p per liter since early September
• Oil prices had already been elevated due to the ongoing Iran conflict

Central Bank Response:

ECB President Christine Lagarde warned that eurozone inflation would remain above target longer than anticipated due to Middle East conflicts. The Federal Reserve, under new chair Kevin Warsh, is expected to raise rates at next week's meeting, potentially conflicting with President Trump's demands for cuts. The Bank of England is likely to hold rates at 3.75%.

Political Context:

Trump suggested the Iran conflict could continue until after November's US midterm elections. US Treasury Secretary Scott Bessent's $6 billion bond buyback intervention failed to stem the selloff, highlighting that only fundamental policy shifts—reduced government spending or higher Fed rates—can sustainably lower yields.

The situation creates particular pressure for UK policymakers balancing investment plans against rising borrowing costs and potential energy bill relief for consumers.