(Bloomberg) — The UK’s long-maturity bonds slid to send yields to the highest since 1998, on bets that the Bank of England will be forced to keep borrowing costs higher for longer.
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The yield on 30-year gilts climbed as much as nine basis points to 5.16%, surpassing a previous peak seen just over a year ago that was initially sparked by former prime minister Liz Truss’s tax-giveaway plans. While the rise this time has been more gradual, investors are demanding greater compensation to lend the government money given an uncertain economic outlook.
That’s led traders to push back expectations for when and how much the BOE can cut interest rates next year. Governor Andrew Bailey hinted Friday that policy makers can’t let up yet in their fight against inflation, after data this week showed a gauge of consumer prices last month failed to slow as forecast.
“Structurally, we think that the UK economy will be weak, but inflation remains too high, raising the spectre of stagflation in the economy,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
The latest leg higher in UK yields follows a similar move in US rates. The 30-year US yield has risen around 15 basis points in the last two sessions to 5.14%, the highest since 2007.
The spike this time is different to the circumstances seen last year, when the bond rout was idiosyncratic to the UK rather than part of a global selloff. While the recent rise has been more orderly, it still reflects a challenge for UK policy makers and investors.
Many fund managers, including at BlackRock Inc. and Aviva Investors, have been piling into gilts on a bet that inflation will slow down and enable the BOE to slash rates. Instead bondholders are sitting on a loss of more than 6% this year, according to a Bloomberg index.
“The long end of the market is giving up on the chances of rate cuts any time soon,” said Charles Diebel, head of fixed income at Mediolanum International Funds.
–With assistance from James Hirai.
(Updates with comments and context throughout.)
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