(Bloomberg) — Investors unloaded UK bonds following a report that the government will significantly increase its ability to borrow in next week’s budget.
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The yield on 10-year gilts rose as much as seven basis points to 4.27%, widening the spread over equivalent German notes to 199 basis points, the highest in a year. The moves contrast with a global rebound in bond markets on Thursday, which lowered rates across the board.
The latest moves come after The Guardian newspaper reported UK Chancellor of the Exchequer Rachel Reeves will give herself about £50 billion ($64.9 billion) of extra borrowing headroom in next week’s budget, when Reeves is expected to announce measures to help fill a £22 billion spending hole.
Reeves said in an article in the Financial Times on Thursday that her new rules would “ensure we don’t see the falls in public sector investment that were planned under the last government.”
That prospect of more borrowing led money markets to pare bets on the scope for Bank of England rate cuts next year by around six basis points, compounding the moves in gilts. Traders still see a quarter-point reduction next month with another likely to follow in December.
“If the debt is being increased to stimulate growth — this also means that BOE will need to re adjust their policy biases,” said Pooja Kumra, head of European rates strategy at Toronto Dominion Bank, pointing to fiscal policy becoming inflationary.
Longer-maturity yields, which are usually more sensitive to possible changes in debt issuance, rose less. That could be because of a trend of the country’s Debt Management Office shifting to issue less longer-term bonds, according to Megum Muhic, a strategist at RBC Europe in London.
“This could be the market catching onto the change in DMO issuance patterns — skewing gilts much shorter down the curve,” said Muhic. “Hence higher expected issuance has a greater impact on the belly than the long-end.”
–With assistance from Greg Ritchie.
(Updates moves and context throughout.)
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