"What drives gilt valuations, by and large, is a repricing of BoE policy. Some degree of divergence with other developed rate markets makes sense," said Antoine Bouvet, rates strategist at ING. U.S. Federal Reserve Chair Jerome Powell said on Wednesday the Fed might be at the end of its rate-tightening cycle - a contrast to the BoE, which financial markets expect will keep raising rates in the months ahead. Many economists think Britain is more prone to higher inflation and weak economic growth than its peers - a view reflected in International Monetary Fund forecasts last month. Investors price in a 99% chance of a 0.25 percentage point increase in the BoE's Bank Rate on Thursday, taking it to 4.5%. There is also a roughly 70% chance that it will rise to 5% by November, based on the overnight index swap curve . By contrast, only a minority of economists polled by Reuters last week expect the BoE to raise interest rates above 4.5% this year. (Reporting by Andy Bruce Editing by Mark Potter)
Messaging: @brucereuters)) By Andy Bruce
May 9 (Reuters) - British government bond yields rose on
Tuesday ahead of what looks likely to be another Bank of England
(BoE) interest rate rise this week, as investors priced a more
inflationary outlook into Britain's borrowing costs.
Thirty-year gilt yields rose to their highest
levels since March 8 at 4.228%, as the British bond market
caught up with a similar rise in yields for German and U.S.
bonds on Monday when trading in London was closed following the
coronation of King Charles.
Still, the recent underperformance of British debt
persisted, with the gap between 10-year British and German bond
yields rising above 150 basis points on Tuesday. If maintained for the rest of the day that would - excluding
the market turmoil associated with the economic agenda of former
prime minister Liz Truss in September and October - be the
highest closing premium charged by investors for holding gilts
over Bunds in eight years.
The yield spread is determined by several factors - mostly
interest rate and inflation expectations, but also the amount of
debt issuance in the pipeline and creditworthiness.
British 10-year gilts have consistently yielded more than
comparable U.S. Treasuries for more than a month,
the longest such stretch since 2014.
At 1056 GMT, the 10-year gilt yielded 3.81%, up
4 basis points on the day.
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