LONDON: British government bond prices fell heavily for a second successive day on Tuesday, as a recovery in oil prices and an easing of concerns over Greece helped lift yields to their highest in nearly a week.
Ten-year gilt yields rose more than 9 basis points on the day to peak at 1.471 percent at 1618 GMT, their highest level since Jan. 28. Since hitting a record low 1.337 percent on Friday, 10-year yields have risen by more than 13 basis points, their sharpest two-day move since mid-October.
Much of the move is due to a rebound in oil prices, which have risen by more than 13 percent since Thursday, helping to reduce fears of deflation and knocking the price of US Treasuries.
There has also been some easing of concerns in the immediate aftermath of the election victory by Greece's left-wing Syriza party and stronger-than-expected British data from the manufacturing and construction sectors.
"It's a combination of many factors, domestic as well as international," said RBC fixed income strategist Vatsala Datta.
"That has caused a positive risk appetite, and fixed income markets are reacting to that," she added. Short sterling interest rate futures which last week were pricing in that the Bank of England would not raise interest rates until as late as September 2016, were now factoring in a move two months earlier, Datta said.
The BoE is expected to keep interest rates steady at its rate-setting meeting on Thursday and in a quarterly forecast update next week may surprise markets in a comparatively hawkish direction, according to RBC.
The BoE has said that it views the sharp fall in oil prices over the past six months as unambiguously positive for Britain as a whole -- unlike in the euro zone where it risks entrenching deflation -- as it acts it to boost consumers' spending power.
Construction PMI data earlier on Tuesday and Monday's manufacturing PMI both showed activity expanding faster than expected, and there will be close interest in the equivalent services data due on Wednesday. Gilts have underperformed Bunds this week, with the spread between 10-year gilt and Bund yields now at 111 basis points, 10 basis points wider than a low point reached last week.
Nonetheless, Datta said longer-term concerns persisted over whether the euro zone would find a lasting solution to Greece's debt problems, despite signs that Syriza was adopting a less confrontational approach than in its election campaign.
BoE policymaker Martin Taylor, who sits on the Bank's Financial Policy Committee, said on Tuesday that Greece's debt position remained unsustainable, and that its sovereign creditors looked almost certain to have to take a loss.
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