Forget about sterling; the real action is in the bond market, which has suddenly caught fire.

Yields on 10-year gilts have almost doubled to 1pc; they were just 0.52pc on 12 August.

Investors are reeling, and for good reason.

So what is happening?

For years now, gilt yields have been going down, and further down, in common with fixed income markets in all developed countries.

The cost of long-term borrowing has fallen to ridiculously low levels; in many cases, people have been paying in real terms for the privilege of lending to the Government.

There are cons as well as pros to this.

We’ve seen the emergence of a giant bonds bubble, a false market in gilts fuelled by quantitative easing and the belief that central banks are now the gilt buyer of first resort; asset prices have surged, bolstered by lower discount rates; pension funds have become almost unviable; and an excessively bearish view of long-term economic growth has taken hold, with forecasters confusing artificially low bond yields with the market’s assessment of long-term GDP growth.

The main advantage of cheap money is that it has slashed the cost of government as well as private sector borrowing.

Fixed rate mortgages have tumbled, and companies have been able to borrow more cheaply, which means that the hurdle rate for capital projects has fallen, boosting corporate investment.

Yet the trend in the UK has suddenly turned, for now at least. In the last week alone, yields have jumped from 0.73pc last Monday to 1pc today, going hand in hand with sterling’s drop from $1.30 to $1.24.

Some institutional investors are licking their wounds: since 12 August, the 10 year gilt price is down 3.7pc, the 20 year gilt by 6.6pc and the thirty year gilt by 9pc, according to Hargreaves Lansdown.

So much for a supposedly safe, non-volatile asset. On top of all of this, the gap - or spread - between gilt yields and the yields on German government has increased, rising to almost a whole percentage point. Philip Hammond’s borrowing will be more expensive and his deficit greater; by contrast, pension fund deficits have fallen sharply in recent days.

David Fuller's view

These are important points and they have wider implications.  A 35-year secular trend of falling yields in government bonds, arguably the biggest bull market in history, will not end quietly. 

So far the rise in UK 10-Year Gilt Yields is modest, despite the doubling in yield, albeit from a record low level.  However, we should certainly not ignore this recent move, because at some point it will only be the first upward step in a rise which will go considerably higher as investors / traders simultaneously scramble to get out of Gilts by taking profits and or cutting losses on newer positions.

Why should this happen anytime soon?  It may not, depending on events, but we can only be closer to the eventual reversal in government long-dated bond yields.  1) The US Fed has already stated that it wants to raise rates at this December’s meeting.  2) Gilt Yields have risen because Pound Sterling’s recent decline of approximately 15% will increase UK inflationary pressures.  3) There is talk of governments with negative or even close to negative interest rates responding by increasing fiscal spending.  

Here is a PDF of Allister Heath's article.