LONDON, Nov 5 - British government bond yields surged to their highest levels in a year as global investors reacted to the potential return of Donald Trump in the U.S. presidential election, which might lead to increased inflation and debt issuance.
On Tuesday, the yields on five-, 10-, and 20-year British government bonds reached peaks not seen since November 1, 2023, as gilt prices fell more sharply compared to U.S. Treasuries and German Bunds.
The rise in yields follows a sharp decline in gilt prices last week, driven by Finance Minister Rachel Reeves' first budget announcement on October 30, which included higher-than-expected spending and a significant increase in borrowing beyond the projected £40 billion ($52 billion) in tax hikes.
The five-year gilt yield increased by 11 basis points to 4.449%, while the two-year yield rose by 8 basis points to 4.51%. The 10-year yield also saw a rise of around 7 basis points, reaching 4.52%. The spread between gilt and Bund yields for 30-year debt is now at its widest since October 2022.
Analysts noted that the movements in the gilt market were largely influenced by U.S. factors, including the so-called 'Trump trade' and strong ISM services data. Demand at a recent auction of £3.75 billion in 10-year gilts was reported as the weakest since December.
Market expectations indicate that the Bank of England is likely to cut its benchmark interest rate by a quarter percentage point to 4.75% on Thursday, with gradual reductions anticipated thereafter. In contrast, less loosening is expected from the U.S. Federal Reserve or the European Central Bank.