UK-German yield spread widest since Brexit vote on BoE rate bets

LONDON: The difference in yield between British government bonds and equivalent German debt hit its widest since the day of the Brexit referendum in 2016 on Friday, underscoring how investors are bracing for the Bank of England to raise interest rates.

The spread between yields on British 10-year debt and its German equivalent widened to 129 basis points, the biggest spread since June 23, 2016, when a majority of voters in Britain chose to leave the European Union. Also on Friday, two-year British gilt yields hit their highest since February 2020, just before the coronavirus pandemic struck the country.

Gilt yields have risen sharply in recent weeks on expectations that the BoE is approaching its first post-pandemic interest rate hike with a first increase priced in fully for February next year. Interest rate futures show a roughly 90% chance that the BoE will raise rates by 15 basis points before the end of this year.

Investors do not expect the European Central Bank to be as close to raising borrowing costs. Two-year gilt yields rose as high as 0.536%, up more than five basis points on the day. Ten-, 20- and 30-year gilts also rose by about five or six basis points to levels close to their highest since 2019.