What are bonds and why do they matter?

Bonds are loan-like debt instruments that governments and companies use to raise funds. They pay returns to investors in the form of yields, which are effectively interest rates on the debt.

Mounting concerns over government debt sustainability and long-term inflation has led to expectations that central banks will slow down their pace of interest rate cuts, keeping them higher for longer. This has rattled investors across the globe, prompting a sharp sell-off.

Britain’s long-term borrowing costs hit a fresh 27-year high recently, building pressure on chancellor Rachel Reeves, who will be drawing up this autumn’s statement.

Financial experts have cautioned that the jump in gilt yields is a warning shot to the government to present credible fiscal plans in the budget.

Higher yields means the government must pay more to borrow, and this risks creating a vicious circle where rising debt costs undermine confidence further, pushing yields up again.

Elsewhere, the 30-year Japanese government bond yield also hit an unprecedented level, following the jump in UK, US and eurozone bond yields. Yields on Japan’s 20-year government bonds rose to levels last seen in 1999.