LONDON (Reuters) - Short-dated British government bond yields looked on track for their biggest daily rise in almost two years after the Bank of England left interest rates unchanged on Thursday, disappointing investors who had bet on a cut.
The BoE cited signs that Britain’s economy had picked up since December’s election and that the global economy had stabilised as indications further stimulus was not needed now.
Just before the decision, money markets had pointed to a roughly 50% chance that the BoE would cut rates to 0.5% from 0.75%.
The decision to hold rates sent sterling towards $1.31, up around 0.7% on the day, and British government bond yields higher. [GBP/]
The two-year gilt yield GB2YT=RR touched its highest level since Jan. 10 at 0.536% as of 1436 GMT, up 10 basis points on the day and on track for the biggest one-day rise since Feb. 26 2018.
By contrast, the 10-year gilt yield GB10YT=RR rose by 4 bps to 0.56%, thereby collapsing the British yield curve — or the difference between the two- and 10-year yields — to just 2.5 bps, its lowest level since Aug. 21, when the curve inverted briefly.
The yield curve is a guide to expectations for future changes in interest rates. A flattening yield curve is usually an indication that investors expect weak growth in future.
“Similar to other central banks, we think the BoE’s threshold to change its supportive stance is high, so gilt yields will trade in its recent ranges and a significantly higher break out is unlikely,” said Sajiv Vaid, portfolio manager of the Fidelity MoneyBuilder Income Fund.
The overnight index swap market here now prices in only a 17% chance of a rate cut at the BoE's next meeting, on March 26, and a 52% chance of one at its June meeting.
The spread between yields for 10-year gilts and the equivalent German benchmark Bund EU10YT=RR widened by 3 basis points to 94 basis points, the biggest gap since Jan. 14.
Editing by Larry King