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UK bond market flashes economic warning after hot inflation data

Short-dated UK government bonds sold off sharply on Wednesday as scorching inflation data raised expectations for Bank of England rate hikes, raising concerns over Britain’s economic outlook to its highest level since 2008.

Two-year government bond yields, which are sensitive to monetary policy expectations, rose 0.24 percentage point to 2.39 percent in the morning.

Longer-term bonds came under softer selling pressure, with 10-year yields rising 0.11 percentage point to 2.23 percent.

The moves caused two-year yields to trade more than 0.15 percentage points above their 10-year counterparts, the biggest ‘inversion’ of the UK yield curve since the 2008 global financial crisis.

Investors typically charge higher borrowing costs because of the risk of buying bonds that mature long into the future, meaning yield curves normally slope upward.

Difference in two and ten year gold yields

An inverted curve is a sign that investors expect the BoE to raise interest rates sharply in the near term to contain inflation, something that is expected to cause a contraction in future economic output.

After data from Wednesday that showed UK consumer prices rose 10.1 percent year-on-year in July — the highest inflation rate in more than 40 years and ahead of economists’ consensus forecast — traders now expect 2 percentage points of BoE rate hikes by next year. May.

The day before, the markets pointed to 1.6 percentage point rate hikes.

The central bank has already raised its key interest rate from 0.1 percent in November 2021 to 1.75% this month.

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