By David Milliken
LONDON (Reuters) – British long-dated government bond yields rose to their highest in more than three months on Thursday as a global improvement in risk appetite and the prospect of big increases in public spending overshadowed a more dovish Bank of England.
Ten-year gilt yields () peaked at 0.814%, up around 9 basis points on the day and the highest since July 16, and 20- and 30-year yields gained a similar amount () ().
By contrast, two-year yields () barely budged — pinned down by an unexpected split vote at the Bank of England — and the two-year/10-year yield curve rose to its steepest since July 15 at 24 basis points.
The steepening yield curve reflected countervailing forces at play for different maturities of gilts.
Markets received a shock earlier in the day when two BoE policymakers unexpectedly voted to cut rates, and the majority said a rate cut could become necessary if Brexit uncertainty and a global slowdown did not ease.
One measure of interest rate expectations now prices in a two thirds chance of a quarter-point BoE rate cut by the end of next year, compared with just over half on Wednesday, pushing down on two-year and five-year gilt yields, which are already well below the BoE’s 0.75% Bank Rate.
But the broader tone in markets on Thursday was negative for fixed income assets, bolstered by increased optimism about a trade deal between the United States and China.
German 10-year Bunds , like their British counterparts, rose to their highest since mid-July.
And for longer-dated gilts, there was added upward pressure on yields from the second day of Britain’s election campaign, in which both the Conservative Party and the Labour opposition promised big increases in spending if they win the Dec. 12 vote.
The fiscal news was “arguably more significant” for gilts than the BoE decision, Capital Economics analyst Oliver Allan wrote in a note to clients.
Labour’s would-be finance minister, John McDonnell, promised an extra 150 billion pounds ($ 192 billion) of infrastructure spending during the next five years, on top of 250 billion pounds he has already promised for the coming decade.
McDonnell’s Conservative counterpart, Sajid Javid, said he would spend an extra 100 billion pounds.
Both plans would require a significant increase in gilt issuance over the medium term, and could push up inflation or BoE rates if the spending hits the economy at a time when it is close to full capacity.
However, Capital said it expected the increase in British yields to be limited as any significant rise would attract foreign investors at a time when yields on much euro zone debt are below zero.
“Although UK yields are low historically, they are not particularly low relative to those elsewhere in the developed world,” Allen said.
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