UK yields surge amid ongoing bond sell-off

British yield followed the US ones higher today, pushing the 10-year yield toward 1.205 again, while the 2-year yield jumped to its cycle highs slightly below the psychological 1% threshold.

UK public finance data

Earlier in the day, the Office for National Statistics showed that UK government borrowing fell more than expected in December thanks to improved tax revenues.

Public sector net borrowing, excluding state banks, fell by 7.6 billion GBP year-on-year in December to 16.8 billion GBP, way below expectations of 18.5 billion GBP, as tax receipts rose. That was the fourth-highest December borrowing figure since monthly records began in 1993.

Tax receipts were up 6.2 billion GBP yearly, while government spending declined 1 billion GBP to 86.7 million GBP. At the same time, interest payments rose by 5.4 billion GBP year-on-year to 8.1 billion GBP in December.

As for the start of the new financial year, Britain has borrowed 146.8 billion GBP, down 129.3 billion GBP from the same period a year ago.

Public sector net borrowing in December was broadly in line with the Office for Budget Responsibility’s forecast from last October. But, with inflation set to keep pushing higher until April, borrowing is likely to return to overshooting the OBR’s forecast in the coming months, Bethany Beckett, the UK economist at Capital Economics, said.

Focus on Fed & BoE

The US Federal Reserve begins its two-day policy meeting today. Although no changes to monetary policy are expected, the following statement, dot plot, and any additional information regarding rate hikes and the balance sheet reduction will be crucial for investors.

Should the outcome of this meeting sound hawkish, we might see further stress in the global bond markets, likely sending yields further higher.

Alternatively, considering the recent losses in equities, the Fed might choose the wording very carefully in a dovish way. In that case, we might see a relief rally both in stocks and bonds, pushing their yields lower.

Nevertheless, the Bank of England is expected to raise rates at its February meeting, likely causing further selling pressure in the short-term bonds. Therefore, the 2-year yield might advance toward the 1% level. That level was last seen in 2011 – representing 11-year highs.

Alternatively, the support for the yield could be at 0.8%, and as long as it remains above it, the uptrend appears intact.

UK yields daily chart, Source: Author´s analysis, tradingview.com