UK two-year gilt yields hit post-Brexit vote high on reports of talks progress

LONDON: British two-year government bond yields touched their highest level since June 2016's Brexit vote on Wednesday as bond prices fell after media reports that Britain was close to a deal with the European Union on how much it needs to pay to leave.

The offer, which British newspapers valued at around 50 billion euros ($59.3 billion), reflected the bulk of outstanding EU demands that include London paying a share of post-Brexit EU spending on commitments made before Britain leaves in March 2019 as well as funding of EU staff pensions for decades to come.

A British government official said they "do not recognise" this account of the talks going on ahead of a visit by Prime Minister Theresa May to Brussels this coming Monday.

Two-year gilt yields were 4 basis points higher at 0.51 percent at 0830 GMT, after earlier touching 0.534 percent, their highest since June 23, 2016.

Ten-year yields were 5 basis points higher at 1.304 percent, having earlier peaked at a 1.328 percent, the highest since Nov. 17.

Fixed income strategists said the fall in bond prices reflected greater confidence that Britain and the EU would be able to reach a transitional deal that would support growth, rather than concern about the size of the exit bill.

"I don't think it's concern about the size of the Brexit bill, more that there's been progress which might offer a more positive signal for the economy," said Marc Ostwald of ADM Investor Services.

Sam Hill, an economist at RBC, said that at least some of the rise in yields was linked to increased hopes of a deal.

"Given the exchange rate reacted almost instantly yesterday, it would seem reasonable that some of the move in bond yields is related to the ... increase likelihood of a breakthrough in December," he said.

German bond yields were also up on Wednesday due to higher than expected regional inflation data.