FTSE 100 rallies as bond market pressure eases

The FTSE 100 extended its rally for a third consecutive day on Tuesday, buoyed by a calmer bond market and strong gains in healthcare stocks. The index climbed 0.6% in early trading, following gains of 0.34% on Monday and 0.32% on Friday. AstraZeneca led the charge with a 2% rise, significantly impacting the index due to its large weighting. The broader STOXX 600 also advanced, reflecting similar gains across Europe.

The rebound comes after a tumultuous week where the FTSE 100 suffered a 2.2% decline, its worst since April, amid surging UK gilt yields and a broader reassessment of equities versus bonds. While euro-zone bond yields eased on Tuesday, the underlying pressures remain. The UK 10-year gilt yield surpassed 5.4%, its highest since 2007, and the 30-year yield briefly hit 6%, a level not seen since 1998.

Russ Mould, investment director at AJ Bell, noted that rising gilt yields are now competing directly with FTSE 100 income, as the 10-year gilt yield exceeds the index’s expected 2026 dividend yield by over two percentage points. Despite this, the FTSE’s earnings yield of about 7.4% still supports equities. Healthcare stocks also provided a boost, with the STOXX 600 gaining 0.8%, driven by a 1.6% rise in the sector and strong performance from Denmark’s Genmab following positive trial results.

The FTSE 100’s defensive and internationally exposed nature means it benefits from calmer bond markets and softer oil prices, even as the UK economy faces challenges. However, inflation remains a significant concern. The UK services PMI for September came in at 52.1, slightly above expectations but down from August. Firms reported the sharpest increase in selling prices since May due to rising fuel and wage costs, suggesting further Bank of England tightening may be necessary. While the bond-market shock may be easing, high gilt yields and inflation pressures mean the rebound is not yet a sign of lasting stability.