Struggles in the bond market sector of banks are causing concerns for the FTSE 100 index

The UK's 30-year gilt yields have reached a 27-year high, causing turbulence in the bond market. This turbulence, triggered by a global sell-off and political unease, has raised concerns about the financial market's stability.

In an attempt to curb the sharp rise in gilt yields and stabilize the market, the Bank of England intervened in September 2022. Key decision-makers within the Bank, including then-Governor Andrew Bailey and the Chancellor of the Exchequer, played a significant role in this intervention. The intervention aimed to prevent a potential fire sale in the gilt market, which could have left banks unable to sell assets quickly or easily without significant value loss.

The intervention seemed to have a positive effect on some banks. Lloyds and Barclays, for instance, saw their stocks recover from slumps earlier in the week, with Lloyds reaching 79.9 and Barclays reaching 365.35.

However, the turbulence in the bond market could create issues for the FTSE 100. The financial sector, being the largest weighting in the FTSE 100, is a major driver of the index. Britain's banking giants, such as HSBC, Standard Chartered, Barclays, Natwest, and Lloyds, collectively hold a substantial amount of government bonds, making them vulnerable to a sharp and rapid increase in gilt yields.

The FTSE 100's Big Five, with a combined market value exceeding £336bn, account for more than 15% of the index's market capitalization. Notably, HSBC, with a market cap of over £165bn, is the second most valuable constituent of the FTSE 100.

During the bond market's turbulence, the financial and communication sectors have acted as a drag on the FTSE 100. However, on Thursday, banking shares rallied as the bond market cooled down. Natwest's stock, for example, jumped over one percent to 516.20, recovering from previous lows of 501.60.

Kathleen Brooks, research director at XTB, has stated that if long-dated bonds continue to fall and yields continue to rise, this could be a problem for banking stocks. The weakness in banks could potentially hurt the FTSE 100, as the sector is a major driver of the index.

City AM's analysis this year showed that the Big Five have added £80bn in market value so far this year. Despite the current market turbulence, it remains to be seen how the bond market's instability will impact the FTSE 100 in the long run.

Struggles in the bond market sector of banks are causing concerns for the FTSE 100 index