Rising oil prices to blame for a surge in global bond yields

Rising oil prices to blame for a surge in global bond yields

12 Oct 2026

Brent Crude Oil breached the $100 a barrel threshold again at the end of Q3, having begun the quarter at $72. The US conflict with Iran seems no closer to a resolution and as a result, global inflation continues to be pushed higher.

Simeon Willis and Emma Coleman explore the key developments shaping markets in our latest Investment Quarterly update.

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Inflation – and thus the growing expectation of further central bank rate rises in the near future – have driven a global bond sell off over the third quarter. The US Treasury took rare measures to intervene in the US Treasuries market over August by announcing it would double its buy backs of long-term government bonds in a bid to contain the rising costs of financing its own debt.

The UK has also felt the pinch of rising borrowing costs ahead of UK Chancellor John Healy’s first Autumn Budget. Fiscal headroom rules have constrained the government’s ability to fund public spending through additional debt and whilst the government has sought to ease some of the spending pressure on households through the removal of VAT on energy bills, tax increases seem likely. Prime Minister Andy Burnham has also committed to ending the state pension triple-lock at the end of the current parliament to help fund a proposed National Care Service as the UK government looks to rebalance its use of public money.

Despite UK Consumer Prices Inflation rising to 3.1% in the 12-months to August, the Bank of England narrowly voted not to increase the bank rate from 3.75% in September. On the other hand, the Federal Reserve (Fed) unanimously voted to increase their interest rate by a quarter percentage point for the first time since 2023. The Fed rate now sits at a range of 3.75% - 4.00% and four more rate rises have been priced into futures markets over the next 12 months.

The European Central Bank (ECB) and Bank of Japan (BOJ) joined the Fed with 0.25% rate increases during the quarter. This was the second rate hike of the year by the ECB, up to 2.5%. The BOJ’s interest rate of 1.25% is the highest it has been for over three decades.

Global equity market performance was positive over the third quarter as AI confidence returned, providing a boost to both developed markets (largely driven by the performance of the US) and emerging markets. UK equities performed particularly well in Q3 thanks to its exposure to financials benefitting from the expectations of higher-for-longer interest rates and the energy sector benefitting from rising global energy supply costs.

UK fixed interest gilt yields rose to their highest levels since 2007 just before the quarter end and so it is no surprise that the asset class performed poorly over the third quarter. Index linked gilts also posted negative returns but were offset by rising long-term inflation expectations. Despite the sell-off in UK gilts, Liability Driven Investment (LDI) recapitalisation activity for UK defined benefit pension schemes has been relatively muted thus far, testament to the improved resilience of the leveraged LDI market since the 2022 mini-budget gilts crisis. UK corporate bonds and global high yield bonds both suffered negative performance as global sovereign bond yields around the globe rose.

Aggregate UK DB pension scheme funding levels on a low risk basis rose thanks to rising yields reducing the present value of their liabilities. This will have been matched to some extent by a fall in liability hedging assets but positive growth asset performance has
helped assets to outpace liabilities overall.

The charts above are based on data from The Pensions Regulator, the PPF 7800 Index and the XPS data pool. The assumptions used in the UK:DB long-term target basis include a discount interest rate of gilt yields plus 0.5%. The assumed asset allocation is 15.5% equities, 24.4% credit, 4.5% multi-asset, 5.9% property and 49.7% in liability driven investment (LDI) with the LDI overlay providing an 85% hedge on inflation and interest rates.

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For further information, please get in touch with Simeon Willis, Emma Coleman or speak to your usual XPS Group contact.

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