The 30-year British gilt yield peaked at 5.649% at 1222 GMT, up more than 30 basis points on the day, before easing back to show a rise of around 18 bps at 5.53% at 1500 GMT.
The rise was roughly on par with Monday’s increase, which was the biggest one-day move since shortly after former Prime Minister Liz Truss’ failed “mini-budget” in Oct 2022.
Long-dated bond yields have rocketed across major economies, led by US Treasury yields. Japanese yields hit a 21-year high.
But, Wednesday’s increase in British 30-year gilt yields was sharper than a 10 bps rise in equivalent US Treasuries, reminding some analysts of Britain’s fiscal vulnerabilities.
“The problem now for the UK bond market is one of liquidity and positioning,” said Kathleen Brooks, research director at brokers XTB.
On Wednesday the Bank of England, in a quarterly update on financial risks, noted that hedge funds had £61 billion (US$78 billion) of net gilt repo borrowing last month, up from £4 billion at the start of 2024.
“Use of leverage, if not properly managed, could amplify shocks and cause a jump to illiquidity,” the BoE said.
Rate cut bets
Ten-year gilt yields were 12 basis points higher at 4.73%, while two-year yields were down 3 bps at 3.93% as investors stepped up bets that the BoE would cut rates faster this year.
The spread between two-year and 30-year gilt yields reached its widest since March 2017 at 171 basis points, more than 30 bps wider on the day.
Interest rate futures priced in 83 basis points in rate cuts by the BoE this year and saw a rate cut of at least a quarter point on May 8 after the BoE’s next meeting as a near certainty, with a roughly 10% chance of a bigger half-point move.
Before Trump detailed his tariff plans last week, markets saw only a 50% chance of a rate cut next month and just over 50 bps of loosening by the end of 2025.
Finance minister Rachel Reeves pushed back on Tuesday and again on Wednesday against suggestions that a slowdown caused by Trump’s tariffs would require her to abandon her fiscal rules.
A fiscal update last month gave her little leeway to hit her target.
“If yields go up and stay up, this causes problems for the UK fiscal position and could put pressure on sterling as well,” said Michael Metcalfe, head of macro strategy at State Street Global Markets in London.
For now, investors are showing strong demand for British government debt with an auction of £4.5 billion pounds of five-year gilts nearly three times oversubscribed on Wednesday.
That said, the yield tail – a measure of whether below-average bids were successful – was the highest for any auction since November.