Two-year gilt yields head for three-week high as investors rethink BoE rate bets
By Andy Bruce
LONDON, July 17 (Reuters) - Short-dated gilt yields looked on track for their highest weekly close since June 26 on Friday, as comments from Bank of England Governor Mark Carney increasingly persuaded markets that an interest rates could rise by the end of the year.
Gilts sharply underperformed against rallying German Bunds, pressured by Carney's comments late on Thursday that a decision to hike BoE rates from record lows would come into "sharper relief" around the turn of the year.
Interest-rate sensitive two-year gilt yields rose by around 4.5 basis points on the day to 0.65 percent -- on track for their highest close in three weeks. Short sterling futures <_0FSS:_> edged down, particularly for the 2016 contracts.
Carney's comments also pushed sterling to a 7-1/2-year high against a trade-weighted basked of currencies on Friday.
RBC strategist Vatsala Datta said the market shifted its view on the timing of a first BoE rate hike sharply since last week, from around July 2016 to now fully pricing in a rise by February.
"It certainly feels like that the end of this year is now in play -- that's been our call all along anyway so I wouldn't rule it out," Datta said.
BoE policymakers look likely to end their united front and split on whether to raise interest rates next month, even with the latest data showing inflation at zero and a rise in unemployment.
The premium that the benchmark 10-year gilt offers over the equivalent German Bund rose by around 4 points to 128 basis points, reflecting a surge in Bund prices as German lawmakers entered into a fractious debate on Greek crisis.
The 10-year gilt yield itself was flat at 2.08 percent.
Sept long gilt future 115.32 (-0.09)
Sept 2015 short sterling 99.36 (+0.01)
March 2016 short sterling 99.08 (-0.03)
10-year yield 2.09 pct (+1.5 bps)
-------------------KEY MARKET DATA--------------------------- Long Gilt futures <_0FLG:_> Gilt benchmark chain Short Stg futures <_0FSS:_> Cash market quotes Deposit rates Sterling cross rates UK debt speedguide -------------------KEY MARKET REPORTS-------------------------- Gilts Sterling Euro Debt Dollar U.S. Treasuries Debt reports --------------------GILT STRIPS DATA ------------------------- Gilt strips data All gilt strips Gilt strips IO Gilt strips PO (Reporting by Andy Bruce; Editing by Toby Chopra)
