By William Schomberg and David Milliken
LONDON (Reuters) – British government bond yields hit their highest in a year on Tuesday as global investors braced for a U.S. election outcome that could return Donald Trump to the White House with plans that might push up inflation and debt issuance.
The yields on British five-, 10- and 20-year government bonds all touched their highest since Nov. 1, 2023 as gilt prices fell faster than those of U.S. Treasuries and German Bunds.
British government bond prices had already fallen sharply last week, pushing up yields, after finance minister Rachel Reeves delivered her first budget on Oct. 30.
Her plan included higher-than-expected spending and a jump in borrowing that is bigger than the 40 billion pounds ($52 billion) in tax increases.
The five-year gilt yield rose the most on Tuesday, up 11 basis points on the day to a peak of 4.449%. The yield premium over German Bunds widened by 7 bps to 214 bps, the highest since September 2023.
The two-year gilt yield was up 8 bps on the day at 4.51% while the 10-year yield rose around 7 bps to 4.52%. The gilt-Bund spread for 30-year debt hit its widest point since October 2022.
Gilts often move more sharply than Treasuries or Bunds, and Michiel Tukker, senior European rates strategist at ING, said Tuesday’s move was largely U.S.-driven.
“The Trump trade led to some steepening of the U.S. Treasury curve, whilst strong ISM services data also pushed up yields. Together these easily account for the higher gilt yields,” he said.
Demand at a sale of 3.75 billion pounds of benchmark 10-year gilts on Tuesday was the weakest for any auction since December.
Last week’s rise in yields was attributed by many analysts to the risk that the Bank of England will cut interest rates less than previous estimates in response to the budget stimulus.
The BoE is widely expected to cut its benchmark rate by a quarter of a percentage point to 4.75% on Thursday. But markets price in only gradual rate cuts thereafter to 4.25% or 4% by the end of next year. Less loosening is expected from the U.S. Federal Reserve or European Central Bank.
($1 = 0.7705 pounds)
(Writing by William Schomberg and David Milliken; editing by Ed Osmond, Mark Heinrich and Richard Chang)
