FTSE 100 falls 1.7% amid bond market worries

London's stock market experienced a significant downturn on Thursday, with the FTSE 100 index closing 1.7% lower. The decline was influenced by persistent volatility in the bond market, where yields remained near multi-year highs. The FTSE 100 finished the trading day at 10,428.27 points, down 177.73 points.

Factors Driving Market Sentiment

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Russ Mould, investment director at AJ Bell, attributed the market pressures to a combination of factors. He stated that "heightened tensions in the Middle East, concerns over the UK’s fiscal situation, and sticky inflation are all feeding into government bond yields." These concerns are leading investors to consider fixed income assets over equities for capital protection, especially as the 10-year gilt yield is trading significantly above the FTSE 100's projected dividend yield for 2026.

The yield on the UK 10-year gilt stood at 5.40% on Thursday, a slight decrease from 5.43% the previous day, but it had earlier risen above 5.50%. Similarly, 30-year gilt yields surpassed 6.0% for the first time since 1998 before settling at 5.97% by the close of London's equity market. In the US, Treasury yields also saw increases, with the 10-year Treasury yield at 5.30% and the 30-year yield at 5.63%.

Impact on Financial Sector and Housing Market

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The bond market pressures had a notable impact on financial institutions. Lenders such as NatWest, Lloyds, HSBC, and Barclays all saw their share prices fall, with NatWest down 5.4% and Lloyds down 4.5%. This sector is also anticipating the budget announcement on October 28, with speculation about a potential increase in the banking surcharge. Chancellor John Healey has summoned the chief executives of major UK banks, including Barclays, HSBC, Lloyds Banking Group, and NatWest Group, for a meeting next Tuesday, ahead of his first budget.

The housing market showed signs of cooling, with Nationwide data revealing that house prices rose by 0.8% year-on-year in September. This marks the weakest increase since December 2025, a significant slowdown from the 1.6% rise recorded in August. Analysts noted that the market remains susceptible to external factors, including geopolitical tensions affecting energy prices and mortgage rates.

Monetary Policy Considerations

Catherine Mann, a member of the Bank of England's Monetary Policy Committee, indicated that interest rate rises may be necessary to manage inflation risks and uphold the bank's credibility. She stated that the central bank cannot solely rely on market tightening and that a clear policy path is required. "At some point, we need to follow through with Bank Rate rises, to maintain credibility, and to avoid policy expectations repricing downwards and inflation expectations repricing further upwards," Ms Mann said.