UK gilt yield curve steepens sharply on Scotland vote risk

LONDON: Long-dated British government bond prices tumbled on Monday after supporters of Scottish independence from Britain took their first opinion poll lead less than two weeks before a referendum.

The yield curve steepened sharply and sterling fell to a near 10-month low against the dollar following the YouGov survey, which put the "Yes" vote on 51 percent against the "no" camp on 49 percent.

Scots head to the voting booths next Thursday.

Marc Ostwald, strategist at ADM Investor Services, said the risk that Scotland might become independent had largely been overlooked in the market - until now.

"All those things that had been ignored, as we had the rose-tinted glasses and interest rate differentials, have suddenly come to order," said Ostwald.

"The UK is not what everyone said it was on the tin just a month ago. The natural inclination is to steepen the curve - and that's not because people are worried about what the Bank of England will do."

At 0921 GMT, the 30-year gilt yield was around 3 basis points higher on the day at 3.15 percent, having earlier touched a more than three-week high of 3.16 percent.

At the short end, the two-year gilt yield was down around 7 basis points at 0.752 percent at 0750 GMT.

Short-sterling futures gained sharply, particularly for the mid to late-2015 contracts and further out, suggesting weaker expectations for Bank of England rate hikes over the next few years.

This in part reflected the possibility that a vote in favour of Scottish independence could leave Bank of England interest rates on hold during a period of economic uncertainty, said Ostwald.

British five-year credit default swap prices outperformed US and German CDS, having risen around 2.5 basis points over the last two trading days to 20 basis points on Monday, according to data from Markit.

The yield spread between the British 10-year gilt and the equivalent German Bund touched 156.4 basis points shortly after trading started, its highest since the second quarter of 1997. It has since receded to 153 basis points.