LONDON (Reuters) – Britain’s gilt yields rose across the curve, while the premium investors demand to hold UK debt, rather than German, hit its highest since August 2023 as investors digested Britain’s new budget that is set to raise borrowing, spending and taxes.
Britain’s 10-year gilt yield was last up 3.5 basis points (bps) on the day, after rising as high as 4.392%, reversing an earlier fall of as much as 10 bps.
The swing between the intraday high and low in the 10-year gilt yield was the second-largest this year, according to LSEG data.
Investors and analysts struggled to pinpoint the exact reason for the reversal, but some pointed to the release of the Office for Budget Responsibility’s official economic forecasts, which laid out the scale of additional spending.
“(Bank of England) Governor (Andrew) Bailey has hinted recently that he wants to reduce interest rates quickly, but the BoE’s forecasts until now have been based on the March Budget plans and we think today’s fiscal easing has exceeded the Committee’s expectations,” said Pantheon Macroeconomics chief UK economist Rob Wood.
Traders slightly trimmed expectations for easing from the BoE in the wake of the budget, pricing in around an 85% chance of a quarter-point cut at next week’s meeting, from around 93% before the budget.
Markets also trimmed expectations for the amount of easing expected in the next 12 months, seeing around 96 bps of cuts – or about four quarter-point moves – versus 115 bps before the budget.
The two-year gilt yield, which is more sensitive to changes in interest rate expectations, rose as much as 10 bps to 4.36%. It was last at 4.312%.
“The lens through which you have to look at fiscal numbers is what does it means for monetary policy because that’s what drives the front end of the curve,” said Laurence Mutkin, head of EMEA rates strategy at BMO.
“Because the fiscal numbers are so expansionary, the outlook for monetary policy is now less dovish and that’s causing the market to reverse.”
The gap between British and German 10-year yields, the premium investors demand to hold British 10-year debt over German, rose as high as 201 bps, its widest since August 2023.
(Reporting by Samuel Indyk and Medha Singh; Editing by Alun John, Amanda Cooper and Mark Potter)
