LONDON: British 10-year government bonds traded at their highest yield premium over equivalent German debt since the middle of 1997, after German government bond prices surged following US payrolls data.
Spreads between British and German debt have been steadily widening since September last year, as traders bet that British monetary policy will tighten and the European Central Bank will loosen its monetary policy stance.
A solid US payrolls number prompted the yield spread to widen to 132 basis points - its highest since September 1997, before Germany joined the euro - as Bund prices soared and gilts did not follow suit to the same extent .
"There were some people who were looking for a little bit of a higher number and were disappointed," said Simon Peck, gilts strategist at Royal Bank of Scotland.
Gilt underperformance was likely to continue, he added.
"I think it's exactly right that gilts are underperforming, and will continue to underperform on the diverging policy outlook," he said. "The ECB 'kitchen-sink'-ed it yesterday, surpassing the vast majority of market expectations."
Thursday saw the ECB become the first major central bank to cut its deposit rate into negative territory after the crisis, as well as announce other liquidity measures to boost the ailing euro zone economy.
Spanish 10-year bond yields fell below British ones for the first time since 2010 earlier on Friday.
Ten-year gilt yields were 4 basis points down on the day at 2.64 percent at 1301 GMT, and earlier in the day yields touched a three-day low of 2.624 percent.
A BoE survey showed 42 percent of Britons expect interest rates to rise within a year, the highest share since May 2011, and most economists think it will move sooner.
Data from British recruitment agencies on Friday showed that the pool of available candidates was drying up at the fastest rate since 1997, and the International Monetary Fund warned the BoE may need to raise rates quickly if it cannot tame fast-rising house prices with other tools.
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