By Harry Robertson
LONDON (Reuters) – Yields on British government bonds climbed on Thursday after a newspaper said finance minister Rachel Reeves was set to give herself a lot more room for borrowing in next week’s budget, which could slow the Bank of England’s interest rate cuts.
Gilt yields rose by about 6 basis points in early trade while those of German and U.S. government bonds fell. At 0800 GMT, the yield on two- and 10-year gilts were up by about four basis points and those on 30-year gilts were up by about three.
That pushed the premium investors demand to hold British 10-year debt over German to as high as 198 basis points on Thursday, just below a 14-month high of 201 bps touched earlier this month.
“It seems to be related to Reeves last night suggesting that the fiscal rules would be re-written to increase spending on infrastructure,” Lyn Graham-Taylor, a senior rates strategist at Rabobank, said.
The Guardian said on Wednesday that Reeves would change how the government assesses the public finances that could free up room for tens of billions of pounds of extra capital spending.
The report cited a senior government source as saying that Reeves would target a measure known as public sector net financial liabilities (PSNFL), replacing the current target of public sector net debt excluding the BoE.
The Institute for Fiscal Studies, a think tank, estimates that if the PSNFL metric had been used in the last budget in March it would have given the then Conservative government an extra 53 billion pounds ($68.73 billion) to borrow without breaking its fiscal rules.
The Guardian said the Treasury had hinted it would not rush to use the extra borrowing that the change to the debt rule would provide.
“While this may not have a significant impact on this FY’s (financial year’s) gilt remit, it implies more borrowing in the coming years, which is clearly not a supportive factor for gilts,” Emmanouil Karimalis, a macro rates strategist at UBS, said.
Interest rate futures showed investors were putting a roughly 86% chance on a quarter-point interest rate cut by the BoE at its November meeting, down from a 100% probability earlier this week.
Gilt investors were also looking at comments by BoE Governor Andrew Bailey on Wednesday when he said there were still “outstanding questions” about whether price pressures could remain stubborn.
($1 = 0.7712 pounds)
(Reporting by Harry Robertson; Writing by William Schomberg; Editing by Jacqueline Wong)
