WHY HAVE BONDS SOLD OFF?

September 8, 2026 3:18 pm Published by Leave your thoughts

08.09.2026 Bonds, across the globe, have had a torrid summer. Below we look at the reasons for the sell-off and discuss whether they now offer value as investments.

Bonds are financial investments that pay a fixed rate of interest for a number of years. When the investment comes to an end the original principal is paid back.

Bonds issued by major governments around the world have been particularly weak over the summer. This reflects worries about inflation caused by the continuing Gulf War. It also reflects longer term worries about high government debt levels and large deficits.

The short-term inflation worries are manageable if central banks raise interest rates to slow the transition of rising oil prices into general inflation. The European Central Bank is expected to raise interest rates this month. It would help if the US Federal Reserve also did the same.

Worries about high debt and large deficits are harder to fix. This is because it takes difficult political decisions to cut spending or raise taxes. Only a genuine fiscal crisis is likely to trigger a more disciplined budgetary stance. So, markets are likely to have to move to price in the financial risks associated with high debts and deficits.

The UK currently has a deficit of 4% of GDP (Gross Domestic Product) and a debt to GDP ratio of about 95%. With interest rates on 10 year government bonds above 5% one can argue that the risks are probably priced in.  However, the UK has a new Prime Minister and a new government. The forthcoming budget on October 28th will be crucial for the establishment of fiscal credibility. The budget will need to announce both spending cuts and tax rises.

So, UK 10 year government bonds are currently good value. However, a credible budget will be required if progress is to be made in reducing interest rates on government debt.

For information only. Investors should seek professional advice for their own circumstances before making an investment.

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This post was written by Robin