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Stronger GDP data pushes UK 5-year yields to highest since Brexit vote

[LONDON] British five-year government bond yields rose to their highest level since last year's vote to leave the European Union on Wednesday, as financial markets priced in faster Bank of England (BOE) rate rises after stronger-than-expected growth data.

Third-quarter gross domestic product grew 0.4 per cent on a quarterly basis according to preliminary figures from the Office for National Statistics, beating average forecasts in a Reuters poll for a 0.3 per cent rise.

Sterling surged and British government bond prices sold off as interest rate futures priced in a greater chance of rate rises next year, on top of a widely expected rate increase next week.

Five-year gilt yields rose 6 basis points on the day to peak at 0.865 per cent at 1037 GMT, their highest level since Britons voted to leave the EU bloc on June 23, 2016.

Ten-year yields rose by a similar amount to peak at 1.420 per cent, their highest since Sept 28, and gilts heavily underperformed against German debt. Gilts' yield premium over 10-year Bunds widened by 5 basis points to 93 basis points, its highest since Oct 17, despite Bund yields themselves hitting their highest in nearly three weeks.

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Vatsala Datta, a fixed income strategist at Royal Bank of Canada, said markets now priced in an 88 per cent change of a BOE rate rise next week, up from just over 80 per cent on Tuesday.

The chances of the BoE hiking again in February had risen to 50 per cent, and markets fully priced in a second rate hike by September 2018, compared with November previously.

Some of this looked like an over-reaction to the figures, Datta said.

"I think it would be very difficult for the BoE to make two hikes in three months," she said. "Generally the data has been quite weak ... and a lot depends on Brexit negotiations."


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