UK gilt prices extend slump after BoE minutes

LONDON: British government bond prices slumped for the fourth straight session on Wednesday after Bank of England minutes showed some policymakers thought the case for raising interest rates was now more finely balanced.

After falling sharply last week, the premium 10-year gilts offer over the equivalent German Bund briefly touched a new 15-year record, while gilt yields rose across the range of maturities.

The 10-year yield was last up around 4 basis points at 2.643 percent, having reached a session high of 2.665 percent after the BoE minutes and a strong set of retail sales figures.

Andy Chaytor, strategist at Nomura, said he thought the market would continue to digest the minutes over the next couple of days, likely resulting in a slightly flatter yield curve.

He pointed to the fact that although there was a marked rise in yields for longer maturity gilts shortly after the minutes, yields for shorter gilts caught up later in the session too.

"Initially it was more of a steepening move, now it's more of a parallel shift and I think eventually it will, when it's fully digested, be more of a flattening move - I'll be looking for that to develop over the next couple of trading days," said Chaytor.

Sterling hit a five-and-a-half year high on a trade-weighted basis after the minutes, which came a week after BoE Governor Mark Carney said that the Bank was only edging towards an increase in borrowing costs.

The yield spread between 10-year British and German government bonds spiked in afternoon trading at 129 basis points, its highest since the third quarter of 1998, before settling back to around 127 basis points - up only slightly on the day.

Given Britain's economy looks likely to continue outpacing its euro zone peers, some gilt strategists expect that spread to widen further still in the coming months.

Short sterling interest rate futures slipped across the 2015 and 2016 strips, indicating markets brought forward expectations for the rate hikes after lurching the other way last week, following the BoE's quarterly inflation report.