Britain's 10-year borrowing costs soar as global bond yields surge

LONDON: A global surge in bond yields prompted the biggest rise in British 10-year borrowing costs since June's Brexit vote, while an auction of a new six-year gilt with a record-low coupon drew strong demand on Tuesday.

The 10-year gilt yield struck a session high of 0.842 percent and was last at 0.81 percent, up 8 basis points on the day - the biggest daily increase since June 20, three days before the vote to leave the European Union.

Gilt yields were hauled higher by Japanese equivalents as investors started to fret about Toyko's apparent shift from monetary easing towards fiscal stimulus, sending major government bond yields higher across the world. Japanese Prime Minister Shinzo Abe's cabinet approved billions of dollars in fiscal measures on Tuesday as the central bank fought market speculation that it is preparing to slow the pace of its monetary stimulus.

"Gilt (prices) have taken quite a knock today from the sell-off triggered by weaker JGBs," said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh. "There's no one particular trigger for this, we're seeing a bit of a technical correction in core government bonds as a whole.

The sentiment has turned a bit more bearish," he said, adding that bond investors were disappointed by the Bank of Japan's policy meeting last week.

Two-year gilt yields rose to their highest level since June 30 at 0.23 percent, and were last at 0.19 percent, up 3 basis points on the day. The yield spread between 10-year gilts and the equivalent German Bund grew by around 1.5 basis points to 84 basis points. Britain received strong demand at an auction of a new gilt due in 2022 with a 0.5 percent coupon - the smallest of any conventional British government bond issued.

The sale received bids worth 2.28 times the 2.5 billion pounds ($3.3 billion) on offer, achieving a yield of 0.54 percent. The strength of demand was only slightly off last month's sale of 1.5 percent 2026 gilts, which attracted the strongest ratio of demand for any conventional gilt auction since 2013.

"(The five-year part of the curve) clearly shows that investors are banking on a prolonged period of very low interest rates, as the Bank of England is almost certain to take aggressive action at Thursday's meeting," Stamenkovic said.