UK 10-year gilt yields climbed to 5.29% on September 2, their highest level since August 2007, while German 10-year Bund yields rose to 3.39%, a peak not seen since 2011. Rising Brent crude prices (between $92 and $97 per barrel) and natural gas across Europe are fueling inflation fears on a continent heavily dependent on energy imports. In the UK, the government’s fiscal headroom has been cut roughly in half, falling from around £23.6 billion to approximately £13 billion, complicating preparations for the October 28 budget announcement. This situation leaves the Bank of England and the European Central Bank facing a delicate balancing act between maintaining elevated rates to curb inflation and avoiding economic contraction. For equity markets, rising yields create direct competitive pressure, with the 5.29% risk-free rate now serving as a higher hurdle for riskier assets.
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