The UK’s short-term government borrowing costs climbed to 5 per cent for the first time since the global financial crisis amid concern the troubling inflation outlook could lead to more aggressive monetary tightening from policymakers.
The two-year bond yield — among the most sensitive to changes in central bank policy — advanced 6 basis points to 5 per cent on Monday, a level last seen in 2008. The latest selloff comes ahead of crucial inflation data Wednesday and the Bank of England’s decision Thursday.
UK government bonds are some of the worst performing among major peers this year, with two-year yields up more than 140 basis points, surpassing the peaks reached on the fallout of then-prime minister Liz Truss’s controversial spending plans.
“There is no obvious near-term trigger to reverse the recent cheapening,” according to Imogen Bachra, head of UK rates strategy at NatWest Markets. “Certainly for the marginal investor in gilts, headlines around reaching post mini-budget highs are more likely to be a cause for concern than encourage demand, despite how cheap they might look.”
Core inflation — which strips out more volatile components — is expected to hold steady at the highest in over four decades, even as the headline number is forecast to have slowed slightly in May. That risks prompting a more hawkish response from officials struggling to curb consumer prices.
Traders are fully pricing in a quarter-point hike this week, and attribute a one-in-five chance of a bigger half-point move, according to swaps tied to BOE meeting dates. Money markets expect the policy rate to peak at 5.75 per cent by year-end, with a one-in-two chance of a final increase to 6 per cent by early next year.
Higher borrowing rates are also filtering through other sectors of the economy. The average two-year fixed-rate home loan jumped above 6 per cent for the first time this year. --Bloomberg L.P.
