British Government Bonds Plunge in Europe-Wide Sell-Off
Government bonds in the UK experienced a significant slump on Thursday, contributing to a broader sell-off across Europe. The price of 30-year gilts reached their lowest point since October 2022, when then-Prime Minister Liz Truss’ “mini-budget” plans caused turmoil in the markets.
The surge in yields for the 30-year gilts, which move inversely to prices, surpassed 17 basis points on the day, reaching a peak of 4.964% at 1251 GMT. This increase surpassed previous highs set just last month and marked the highest point since October 12, 2022.
Similarly, 10-year gilt yields rose by 17 basis points to 4.53% on the day, indicating the largest daily price drop for 10-year gilts since February 6. This movement closely resembled the market fluctuations observed in October last year.
Earlier in the day, the Bank of England (BoE) announced plans to establish a permanent facility to aid pension funds and insurers affected by a lack of liquidity in the gilt market. Such a facility aims to prevent a repeat of last year’s slump in the gilt market.
The decline in euro zone debt prices was primarily driven by a decrease in Italian bonds, following the government’s announcement of reduced growth forecasts and increased borrowing.
Despite the absence of major economic news in Britain, the rise in 10-year gilt yields mirrored that experienced by Italian bonds.
On Thursday, German inflation data for August came in lower than anticipated at 4.3%, down from July’s 6.4%.
Lyn Graham-Taylor, a senior rates strategist at Rabobank, noted that there were few clear triggers for the movement in gilts. He also highlighted the tendency for gilts to undergo sharper price swings compared to other markets due to a lack of liquidity.
The interest-rate sensitive two-year gilt yields rose by 11 basis points on the day, reaching 4.99%. Financial markets are currently indicating a 40% probability of a rate rise by the BoE to 5.5% on November 2, following its next meeting. They have also fully priced in a rate increase to 5.5% by March 2024.
After the BoE’s unexpected decision last week to maintain rates at 5.25%, financial markets initially predicted only a 50% chance of a subsequent rate rise.
More detail via Reuters here… ( Image via Reuters )