LONDON (Reuters) - UK government bonds headed for their biggest weekly slide in more than two years on Friday, as reports of progress in Brexit talks curbed the appeal of safe-haven assets used to guard against the risk of a no-deal EU exit.
Five and 10-year gilt yields GB5YT=RR GB10YT=RR jumped by as much as 13 basis points, after a similar surge on Thursday, hitting three-week highs of 0.515% and 0.716% respectively.
Both yields have risen by around a quarter of a percentage point over the past two days, their biggest increases in more than five years, and on a weekly basis they are on track for their largest rise since September 2017.
The immediate trigger for the sell-off in gilts were remarks from the British and Irish prime ministers, after talks on Thursday, that they had found a “pathway” to a possible deal.
On Friday, the European Union and Britain agreed enough progress had been made to hold intense talks over the next few days in a bid to secure a deal over Britain’s departure from the bloc.
Many analysts were nevertheless cautious about whether the talks would lead to a deal that would meet EU approval and pass through Britain’s parliament before the UK is due to leave the bloc on Oct. 31.
“Market reversals are clearly a risk even on a more positive trend,” Chris Iggo, chief investment officer at AXA Investment Managers, said in a note to clients. “A no-deal hard Brexit remains a possibility and that would still be the scenario with the most market impact,” he added.
Nonetheless, markets have significantly scaled back the likelihood of a Bank of England rate cut before the end of the next year - pricing that is driven by a reduction in the perceived probability of a no-deal Brexit.
Short sterling interest rate futures FSSZ0 for December 2020 fell by 14.5 ticks, their biggest one-day decline since November 2016, and another measure BOEWATCH also pointed to a smaller chance of a rate cut over the coming months.
Reporting by David Milliken; Editing by Andrew Heavens and Alexander Smith