UPDATE 1-UK bonds suffer biggest monthly fall in years after U.S. Treasury rout

David Milliken
·3 min read

* UK five-year gilt yields record biggest monthly rise since 2013

* Ten-year gilt yields within a whisker of biggest rise since 2009

* BoE's Haldane warns that inflation 'tiger' may be on the prowl

* BoE's Ramsden says gilt moves orderly, not worried by inflation

* Sunak to announce over 200 bln pounds of bond issuance next week (Recasts with closing prices)

By David Milliken

LONDON, Feb 26 (Reuters) - British government bond prices recorded their sharpest fall in years this month, as investors bet on a rebound in growth and potentially inflation, days before finance minister Rishi Sunak sets out hefty new borrowing plans.

The month's sharp declines largely reflect a global sell-off led by U.S. Treasuries. But gilts received an extra push on Friday after the Bank of England's chief economist, Andy Haldane, warned that the "tiger" of inflation was stirring.

Ten-year gilt yields touched 0.836%, their highest level since March 2020, when the Bank of England was forced to intervene to calm turbulent markets at the start of the coronavirus pandemic.

Since the start of February, 10-year yields have jumped by nearly 50 basis points according to Refinitiv data.

They came within a whisker of their biggest calendar-month rise since January 2009, when markets judged Britain had passed the most dangerous point of the global financial crisis, during which its banking system had been on the point of collapse.

The last time 10-year yields rose a similar amount was in October 2016 when markets revised down their assessment of the short-term economic damage from that year's Brexit vote.

Five-year gilt yields rose the most since June 2013, when the U.S. Federal Reserve said it would start to slow its bond purchases, leading to a sell-off of U.S. Treasuries and other bonds dubbed the "taper tantrum".

This year, the rollout of coronavirus vaccines in Britain and the United States have boosted market confidence that growth will return strongly this year.

U.S. President Joe Biden's proposal for $1.9 trillion of economic aid also stoked some concern about higher inflation.

INFLATION 'TIGER'?

British short- and medium-dated gilt yields peaked on Friday after Haldane said he feared that inflation - currently well below the BoE's 2% target - could rise faster than the BoE forecast earlier this month.

"There is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets," he said.

Haldane's concerns are not widely shared on the BoE's Monetary Policy Committee.

Deputy Governor Dave Ramsden, speaking after Haldane, said he was reassured by relatively stable inflation expectations in financial markets and among the public.

The slide in gilt prices reflects expectations of "reflation" - growth and inflation getting back to normal - rather than fears of an inflation overshoot - and gilt market moves remain "orderly" for now, Ramsden said.

Global factors are likely to keep pushing British borrowing costs higher unless Sunak delivers an unexpectedly hawkish budget next week, according to Alina Zaytseva, a fixed income strategist at Morgan Stanley.

"The market remains driven by the reflation theme. We believe that UK rates should continue to underperform versus European peers and maintain a steepening bias to the gilt curve," she wrote in a note to clients.

Five year gilts' yield premium over German bonds rose above 95 basis points on Friday, its highest since March 2020.

Next week, Sunak delivers a budget which is set to show the highest borrowing since World War Two as a share of GDP during the 12 months to the end of March.

For the coming financial year, gilt issuance is likely to drop to 231.3 billion pounds ($323 billion) from 485.5 billion pounds this year, Morgan Stanley estimated.

But even with the latest rise in yields and the record borrowing, British debt servicing costs are likely to remain historically low as a share of public revenue. ($1 = 0.7163 pounds) (Reporting by David Milliken; Editing by Andy Bruce and Hugh Lawson)