By Yoruk Bahceli, Amanda Cooper and Harry Robertson
LONDON (Reuters) – British government borrowing costs headed for their biggest weekly jump in over a year on Friday, while the pound faced its longest stretch of weekly losses in six years as Labour’s tax-and-spend budget ignited concerns over inflation and growth.
Two-year gilt yields, which led the selloff as investors pared back their interest rate expectations, were up 30 basis points on the week as of 0746 GMT, set for their biggest weekly rise since June 2023.
Posting most of that rise in the aftermath of Wednesday’s budget, they were up for a tenth straight day on Friday – their longest stretch of price losses in three years.
Benchmark 10-year yields have risen 26 bps, the biggest weekly move since October 2023, having touched their highest in a year on Thursday at 4.526%.
While the surge in government borrowing costs and the drop in the pound have unsettled some investors, the speed and scale of the move fell far short of the crisis that rocked markets in September 2022 after an interim budget from then-Prime Minister Liz Truss that contained billions in unfunded tax cuts.
“2022 was something really quite off the scale. But that doesn’t mean that what we saw this week wasn’t important and it has had an effect on the market,” City Index market strategist Fiona Cincotta said.
Yields have jumped as markets digest the government’s plans, which will add an extra 70 billion pounds a year to the public spending bill compared with now, according to Britain’s fiscal watchdog.
Just over half of that total is covered by higher taxes and the rest through increased borrowing.
The OBR, whose forecasts underpin British government budgets, now expects inflation will average 2.6% next year, compared with a previous 1.5% forecast.
Traders now expect just over 80 basis points of rate cuts by the end of next year, or fewer than four more cuts, having priced well over a percentage point prior to the budget.
Markets still expect a rate cut at the Bank of England’s meeting next Thursday but have reduced their view of the chance of a December cut to less than 50%.
Some investors said the moves may be exacerbated by positioning shifts, with many investors having favoured gilts before the budget.
BNP Paribas Asset Management, which manages 576 billion euros of assets, told Reuters on Thursday it had closed its overweight position in gilts.
Neil Mehta, a portfolio manager at BlueBay Asset Management, said shifting interest rate expectations were only a “small part” of the market moves. He added that stop outs in interest rate futures, where breaches of pre-set market levels prompt selling, were also part of the dynamic.
Sterling meanwhile edged up 0.3% against the euro, though it was still headed for its biggest one-week slide against the single European currency in more than a year, down by 1%.
Against the dollar, it was down 0.4% on the week, set for its fifth weekly decline – the longest such stretch since late 2018.
(Reporting by Yoruk Bahceli, Amanda Cooper and Harry Robertson; Editing by Hugh Lawson)
