Bond Market Turmoil Could Hit Household Finances: Steps to Take Now

Households already under financial pressure could face another setback in the weeks ahead as turmoil in the bond market begins to filter through to everyday finances.

Families are contending with higher mortgage costs, increasingly expensive groceries and energy bills that could rise by hundreds of pounds a year from January.

Now, a worldwide bond sell-off threatens to put further strain on household budgets. Yields surged to their highest levels in decades towards the end of last week, rattling investors across global markets.

The yield on 10-year US Treasury bonds reached its highest point in 24 years, while Britain’s 30-year gilt yield hit 6 per cent for the first time since 1998.

The market upheaval might initially seem like a problem confined to professional bond investors.

However, even modest movements in bond yields can affect the cost of mortgages and other borrowing. They can also weigh on investments held in the stock market, meaning ordinary savers may feel the impact too.

Experts explain the steps households should consider now to limit the damage, as well as some potential ways investors could benefit from the bond market turmoil.

Why are bond yields rising?

Bonds are essentially IOUs issued by governments. The UK Government borrows billions of pounds to support public spending, raising that money through the gilt market.

These loans are divided into tradable securities, known as bonds or gilts in the UK, which are then bought by major financial institutions and individual investors.

Gilts can mature anywhere from a few months to 50 years or more. Investors receive an annual payment, reflected in the yield, before getting the bond’s face value back when it reaches maturity.

Bond prices are particularly vulnerable to concerns about government borrowing, persistent inflation and geopolitical instability.

Investors are becoming increasingly concerned about heavy borrowing by both the UK and US governments. As confidence weakens, they demand higher yields as compensation for buying government debt.

Dan Coatsworth, an analyst at stockbroker AJ Bell, says: ‘The UK and US governments both face significant borrowing requirements at a time when debt-servicing costs are rising.

‘Bond investors waste no time in letting the world know when they lose faith in fiscal policy.’

There are also growing fears that inflation could climb and remain elevated, with disruption to oil and gas supplies linked to the conflict between the US and Iran adding to the pressure.

That could drive up the price of essentials ranging from food and fuel to household goods.

The outlook matters because the Bank of England may raise its base rate to bring inflation under control. Markets are currently anticipating four increases during the coming year.

As inflation rises, investors generally seek higher gilt yields to protect their returns from the erosion of purchasing power.

After all, if the base rate is 4 or 5 per cent, you could get a decent rate just leaving your money in the bank earning interest.

You would need to be offered a yield a good deal higher than that to make it worth your while to buy gilts. 

Existing gilt holders may also sell off their holdings, which pushes down the price as demand diminishes – and which in turn leads to higher yields.

Lale Akoner, of investment platform eToro, says: ‘There is a lot of bond supply at the

moment and there’s not enough demand, especially for the long-duration gilts. When there’s not enough demand, it drives yields higher.’

How does it impact on my money?

Mortgages 

Hundreds of thousands of homeowners could see their monthly home loan payments surge when their fixed-rate deals end in the coming months.

More than 1.8 million homeowners are rolling off fixed-rate products this year – an average of 150,000 a month.

Between this month and December, some 450,000 homeowners are remortgaging. 

These beleaguered borrowers have already faced a blitz of rate hikes in recent weeks as lenders price in expectations for Bank of England base rate rises.

A typical five-year fix mortgage has now broken the 6 per cent barrier, according to rates scrutineer MoneyfactsCompare, and the average two-year deal is trailing closely behind at 5.98 per cent.

There have been rounds of hikes from major high street lenders including Barclays, NatWest and Santander.

A homeowner coming off an average 2.64 per cent five-year mortgage taken out in December 2021 has been paying £1,139 until now. 

If they take out a new five-year fix at 6 per cent, they would now pay £1,368 a month – a rise of £229. The bond market is closely tied with mortgage rates – so when yields go up, so does the cost of home loans.

The bond sell-off has added to that upwards pressure on mortgage deals, says Nicholas Mendes, of broker John Charcol.

Five-year gilt yields – which closely impact five-year fixed-rate mortgage deals – climbed to their highest level since 2008 last week. On Friday they sat around 0.8 percentage points higher than a year ago.

Mendes adds: ‘Lenders have already been pushing up fixed mortgage rates, and when funding costs move this quickly, changes can come within days and deals can be pulled with very little notice.

‘Further increases are likely while markets stay this unsettled.’

Homeowners coming up to remortgage can lock into a deal as early as six months ahead of their fixed-term rate ending.

Start looking before your current deal has expired to protect yourself from future rate rises.

‘This gives protection if rates continue to rise, and it does not stop the borrower moving on to a cheaper deal if rates improve before the new mortgage starts,’ says Mendes.

Investments

Investors who hold shares may think their portfolio is safe from the bond market but the current turmoil is spilling over into stock markets.

Major European indexes tumbled last week. The UK’s FTSE 100 fell by as much as 1.7 percentage points on Thursday alone, while the flagship DAX and CAC indexes also slumped.

Akoner says: ‘When yields are higher, bonds become much more of a credible competitor to stocks.’

It means that stock market investing becomes less desirable, which can cause prices to wobble. Financial companies and housebuilders were among the worst hit last week.

If you have investments in the stock market, don’t be alarmed during a bond market rout.

Coatsworth adds: ‘In any situation where we see gyrations in financial markets, you should never panic. Stick to your investment plan.

‘After payday, people tend to put a set amount of money into their Isa or pension. If you get a pull-back in the stock market, your money should buy more shares.’

You could even look to buy bonds if you are after a safer investment with a strong yield. You can read our guide to buying bonds at thisismoney.co.uk/gilts.

Household bills

Families taking out credit products such as car finance loans will also face higher payments because of the multi-week bond market turmoil.

Bills for car loans and personal loans are set to become more expensive, warns Akoner.

As bond yields and the baseline borrowing cost from the Bank of England climb, car finance companies and loan providers must now pay more to raise the money they are going to lend to customers.

They may then pass these costs directly to borrowers to protect their profit margins.

‘We are already seeing some signs of higher market rates feeding through, with the average effective rate on new personal loans rising from 9.86 per cent in July to 9.96 per cent in August,’ says Akoner.

‘Further increases are possible if market interest-rate expectations remain elevated. 

‘Taking out a loan before it is needed, however, would mean paying interest immediately, while there is no guarantee that rates will be higher in six months.’

General household finances are likely to suffer as growth becomes even more sluggish and public spending is squeezed. Shore up your finances now if you can.

To protect your wallet, Jason Hollands, of investment platform Bestinvest, says: ‘Start battening down the hatches and try to reduce expensive-to-service debts.

‘Do a thorough review of your outgoings. Distinguishing between essential spending and “nice to have” items can help uncover savings.’

He recommends scouring through the best deals for your broadband, mobile and energy bills to save money.

Savings

The sell-off is great news for savers. When bond yields climb, savings rates tend to follow.

‘The bank will invest your savings money,’ says Coatsworth. ‘So, if they can get a better rate on it in the market, they pass that on in their savings products.’

Banks also need to step up their offerings to attract customers when bond yields rise.

After all, if you can get a great yield from gilts, you will need an even better rate from a savings account to lure you away.

If you’re languishing in a poor account, snap up one of the top deals on the best buy tables.

The average easy-access account offers just 2.57 per cent, according to MoneyfactsCompare.

But you can get 4.3 per cent with Oxbury Bank. This means £17.30 more every year on a £1,000 investment.

Pensions

The bond chaos offers a major silver lining for retirees looking to secure a healthy fixed income. Annuity rates have not been this good for years.

Hollands adds: ‘For retirees considering using some or all of their pension to purchase an annuity to provide them with a guaranteed income for life, rising gilt yields might be seen as welcome news.’

Annuity rates – which determine the annual income you can buy with your pension pot – are closely linked with 15-year gilt yields.

These yields have been sitting at around 5.7 per cent in the previous few days – and even climbed to 5.8 per cent on Thursday – in levels last seen around three decades ago, says Hollands.

A healthy 65-year-old buying an annuity that doesn’t rise with inflation can secure an income of more than £8,000 with a £100,000 pot.

That’s up from the less than £5,000 if they had bought the same annuity in 2020.

An annuity is a good option for retirees worried about how the soaring inflation and economic turmoil will hit their spending money.

Speak to a financial adviser if you are thinking about buying an annuity.

There are numerous options, for example, you can use a portion of your pension to buy an annuity that covers your essential living costs.

You can also buy an annuity that pays out for a set number of years rather than for life.

Go to thisismoney.co.uk/annuities for more information about finding an annuity

moneymail@dailymail.co.uk