October 10, 2019 / 5:05 PM / 3 days ago

Gilt yields record biggest jump since 2015 after UK-Ireland Brexit talks

LONDON (Reuters) - British 10-year government bond yields recorded their biggest one-day rise in nearly four years on Thursday after Irish Prime Minister Leo Varadkar said Brexit talks with his British counterpart Boris Johnson had been “very positive”.

Varadkar told Irish reporters that he now thought it was possible for Britain to reach a deal to leave the European Union in an orderly way by an Oct. 31 deadline.

Investors have flocked to British government bonds in recent weeks partly due to fears of a disruptive no-deal Brexit that would force the Bank of England to cut interest rates.

By contrast, the receding prospect of a no-deal Brexit pushes up yields as investors sell bonds.

Ten-year yields hit a two-week high of 0.595% on Thursday after jumping more than 12 basis points, according to Refinitiv data, the biggest one-day rise since Dec. 3, 2015, when markets were roiled by underwhelming European Central Bank stimulus.

Yields had already been lifted across advanced economies by hopes of progress in trade talks between the United States and China which might ease an ongoing global economic slowdown.

Meeting in northwest England, Johnson and Varadkar said they could “see a pathway to a possible deal”, sending sterling sharply higher and yields following suit. [nL5N26V1DP]

However, some analysts urged caution ahead of a meeting between Britain’s Brexit Secretary Stephen Barclay and the EU’s lead negotiator, Michel Barnier, on Friday, and an EU leaders’ summit on Oct. 17-18.

“The statement was predictably light on substance,” Daiwa Capital Markets wrote in a note to clients. “We still think agreement on a Brexit deal at next week’s summit remains highly unlikely.”

The yield spread between 10-year British and German government bonds widened by 6 basis points to 106 basis points, the sharpest such move in a month.

Short sterling interest rate futures also sold off around 4 to 6 ticks across 2020 contracts as investors cut bets that the Bank of England would be forced to lower interest rates.

Earlier on Thursday, BoE Governor Mark Carney said it was his view that the central bank would do whatever it could to support growth if Brexit proved disruptive.

Economists polled by Reuters last month put the odds of a no-deal Brexit at more than one in three.

Editing by Catherine Evans

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