UK Bonds Slide after Inflationary UK Budget Hurts BoE Rate Cut Bets

• British government bond prices tumbled for a second day on Thursday as investors judged finance minister Rachel Reeves' first budget would boost inflation and cause the Bank of England to cut interest rates more slowly.
• Reeves announced the biggest tax rises in three decades, saying she needed to repair the public services, alongside a big rise in borrowing to fund investment on Wednesday.
• Britain's budget watchdog said her plans would boost economic growth in the short run, but it expected inflation would average 2.6% next year compared with a previous 1.5% forecast. That prompted investors to reel in bets that the BoE would reduce interest rates rapidly over the next year.
• As a result, two-year gilt yields jumped by as much as 22 basis points to 4.539%, heading for the biggest one-day rise since August 2023, although by the close, they were only up 11 bps on the day - still the biggest daily rise in four weeks. Ten-year gilt yields hit a one-year high of 4.526% and finished the day around 10 bps higher at 4.45%.
• Investors still think the BoE is likely to cut rates next Thursday by a quarter of a percentage point. Rate futures were pricing that as a nearly 80% probability on Thursday, down from 95% before the budget.
• However, Reeves' plans sowed greater doubt about the outlook for rate cuts further ahead, with investors pricing in around 0.85 percentage points of BoE rate cuts between now and the end of 2025, down from 1.2 percentage points just before the budget. By comparison, they were still pricing almost five further quarter-point cuts from the U.S. Federal Reserve and European Central Bank - both of which have already cut borrowing costs more than the BoE.

(Source: Reuters)