UK government bonds extended their sell-off on Thursday as investors continued to mull the implications of the first Labour budget in 14 years.
In recent weeks, bond markets have had to digest fluctuating oil prices, changing Federal Reserve interest rate expectations and uncertainty about the looming US election result.
Now they are also digesting the sharp increase in government borrowing and expectations of Bank of England (BoE) interest rate cuts, forecast by the Office for Budget Responsibility (OBR).
While US Treasuries and German Bund prices also slipped, there was a larger decline in UK government bonds, also known as gilts. This in turn pushed up yields, or interest rates.
The yield on the 20-year gilt rose to its highest level since early November last year, at 4.855%, up five basis points. Meanwhile, the 10-year rate rose as much as nine basis points to 4.44%, the highest level in almost a year.
Yields also rose on short-dated bonds, which are more sensitive to the outlook for interest rates. The two-year gilt yield rose as much as seven basis points.
Read more: What the budget means for your money
“Market participants have had time to reflect and I think they are still worried about how inflationary the budget may be, how loose it is, and how much it can change the BoE’s reaction in cutting rates,” said Evelyne Gomez-Liechti, strategist at Mizuho International.
Money markets are now pricing in fewer than four interest rate cuts over the next year, compared with nearly five before Wednesday’s budget, which included major increases in public spending and investment, which are expected to push inflation higher.
It comes as the FTSE 100 (^FTSE) was down 0.8% on Thursday, having closed on Wednesday at its worst level since early August
Matt Britzman, senior equity analyst at Hargreaves Lansdown, said the budget had failed “to ignite the market flame”.
He added: “Gilt yields will be watched closely after reaching five-month highs in the aftermath of the Budget. Investors are re-assessing where UK interest rates might end up, given that the investment plan for growth is likely to add inflationary pressures into the economy.”
The Debt Management Office on Wednesday said it will sell £297bn ($386bn ) of government bonds this fiscal year, its second-biggest target on record.
While that was only slightly higher than expectations, investors pointed to official projections that imply around an extra £142bn of borrowing over the next five years.
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