LONDON: British government bonds fell steeply for a second day on Friday, after share prices rebounded and investors judged that Wednesday's leap up in gilt prices was overdone.
Added into the mix were comments from the Bank of England's chief economist that -- although the outlook was gloomier than three months ago, with a risk of long-term stagnation -- a rate rise around the middle of next year was still possible.
A rebound in share prices and a fall in the yields on Greek and Spanish bonds also took the shine off safe-haven British government debt, which is now little changed from last Friday despite some of the biggest one-day moves in more than a year.
Ten-year gilt yields stood 7 basis points higher on the day at 2.16 percent at 1135 GMT, close to a one-week high and well off the trough of 1.937 percent touched early on Thursday, the lowest since May 2013.
Five- and 30-year gilt yields were up a similar amount .
"Peripheral (euro zone) spreads are tighter and equities are higher, so you are seeing a fall in (core) bonds, which gilts are underperforming," said RBC gilts strategist Vatsala Datta.
Ten-year gilts' yield premium over Bunds widened 4 basis points on the day to 131 basis points, and at one point reached their highest in a week at 134.9 basis points. On Wednesday the spread had fallen to a four-month low below 119 basis points.
The effect on the bond market of comments by BoE chief economist Andrew Haldane was harder to tease out.
Haldane said that he -- like financial markets -- had grown gloomier about the economic outlook over the past three months, and had pushed back his expectations of when rates would rise.
But he described expectations of a rate rise in the middle of next year as "not a bad bet". Market expectations for when the BoE will next raise rates have swung sharply this week, exacerbated by a lack of liquidity.
At one point on Wednesday markets appeared to have ruled out any increase in rates at all next year, though on Friday analysts said a move in August or September was now priced in.
Economists polled by Reuters still expect a move in early 2015.
Marc Ostwald, a strategist at ADM Investor Services International, said that markets may have taken Haldane's gloom as a signal that rates would stay on hold for a long time, and moved out of gilts and into riskier assets in a hunt for yield.
RBC's Datta said his comments could be viewed as a reminder that rates would ultimately rise, and that -- particularly for longer-dated bonds -- yields were too low.
Haldane also raised the possibility that Britain's weak productivity and wage growth -- not its recent strong economic expansion -- could prove more typical of the future.
Next week offers more opportunities for investors to take fright at risks to the global economy, particularly with US inflation data due on Wednesday.
Wednesday will also bring a further update of the BoE's views on rates, with the publication of October's Monetary Policy Committee minutes.
The discussion, however, predates the recent market turmoil and data showing a slowing in job creation and a fall in British inflation to a five-year low of 1.2 percent.
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