Two-year gilt yield highest since 2008 as Bank gets set to hike rates

Government borrowing costs hit a 15-year high yesterday, as traders bet interest rates would hit 6 percent by Christmas.

On another turbulent day in bond markets, yields on two-year government bonds rose above 5 percent for the first time since 2008.

At one point they were even 5.085 percent.

That compares to a yield of just over 3 percent four months ago and zero at the start of 2021.

Treasury yields — a key measure of what it costs governments to borrow — are a major driver of mortgage rates, and figures released yesterday showed the cost of a typical two-year fix was more than 6 percent.

Yields have risen sharply since the Bank of England began raising interest rates 18 months ago in its fight to curb inflation.

They spiked higher in the wake of the Liz Truss mini-budget last September, as investors worried about the cost of tax cuts and schemes to help households with skyrocketing utility bills.

With Prime Minister Rishi Sunak and Chancellor Jeremy Hunt pledging to restore order following the takeover of Truss and her Chancellor Kwasi Kwarteng, yields fell again.

But yields on two-year gold-plated government bonds are now well above Truss-era levels as the bank struggles to contain runaway inflation.

It still stands at 8.7 percent despite 12 rate hikes in 18 months — from 0.1 percent to 4.5 percent.

Official figures will show tomorrow whether inflation has fallen further in May, after a peak of 11.1 percent last year.

The Bank – which is tasked with keeping inflation at 2 percent – is expected to raise interest rates again to 4.75 percent on Thursday before a series of further rate hikes in the rest of the year.

Traders expect interest rates to hit 6 percent by the end of the year — a level not seen since 2001 — while markets now place the odds of a 0.5 percentage point hike to 5 percent this week at 30 percent. estimated.

The rise in interest rates has pushed up the cost of borrowing for the government, households and businesses.

Analysts warned that interest rates would have to rise so high to curb inflation that Britain will slide into recession as higher borrowing costs take their toll.

We suspect that inflation will only fall to 2% if the Bank of England triggers a recession by raising interest rates from 4.5% now to a peak of 5.25%, and keeping rates there until the second half. from 2024. ,” says Paul Dales, UK chief economist at Capital Economics.

Yields for longer-dated gilts, which are not as sensitive to interest rate expectations, also rose, but not as much.

The yield on 10-year Gilts rose to 4.49 percent, while the yield on 30-year Gilts was 4.55 percent.

Sunak yesterday ruled out providing financial support to people struggling with mortgages.

“I know how worried people will be about mortgage rates,” the prime minister said.

“That’s why the first priority I set at the beginning of the year was to cut inflation in half, because that’s the best and most important way to keep costs and interest low for people.”