"It gives the impression they don't care about the longer end; that's a green light for yields to rise and that's playing with a bit of fire"
- David Tinsley, an economist at BNP Paribas SA
Britain's long-term borrowing costs soared to a two-year high this week amid growing speculations among market participants that the gilts bull run may finally come to an end. On Wednesday in his first speech in Nottingham BoE's Governor Mark Carney pointed out that long-term interest rates are currently relevant, and said that investors should focus on what will happen to bank rate in the future. This comment was crucial as 70% of loans to households and more than 50% of loans of companies are linked to the Bank of England's benchmark. Even despite Carney's pledge to keep interest rate at record-low until unemployment fall to 7%, gilt yields have risen since the announcement of forward guidance on August 7, suggesting investors are still not convinced.
The yield on government bonds to mature in September 2023 ticked up 3 basis points to 2.80% after Carney's speech, while it has already climbed 25 basis points during this month. At the same time, the implied yield on the gilt due in September 2015 rose 4 basis points to 1.32%. Several economists warned that yields are not expected to fall back to record-low of 1.43, which was reached in August 2012, reinforcing a view this more than two decade bull run is running out of steam. Benchmark 10-year yields on government bonds have fallen steadily since the late 1980s, when they lost more than 12%.
© Dukascopy Bank SA