UK bonds feel the brunt of increasingly hawkish BOE talk

UK government bonds fell across the curve after Bank of England's (BOE) Catherine Mann said policymakers should raise rates more aggressively to mitigate further sterling weakness that risks driving up inflation.

Mann, speaking at a Market News International Connect event, warned that inflation in the UK was likely to prove stronger than thought. The 10-year yield rose as much as 11 basis points as she spoke, edging back toward the highest level since 2014 touched last week.

Her comments follow the BOE's signal that it stands ready to deliver bigger hikes if needed to tame consumer prices. It raised rates for a fifth straight meeting last week to help cap inflation running at a 40-year high.

A widening policy divergence with the Federal Reserve has weighed on sterling, driving it to the weakest level against the dollar in more than 2 years last week. While the BOE isn't targeting the exchange rate, further weakness would raise the relative cost of imports and complicate its task of getting price pressures in the economy under control.

"We suspect that the Bank will err to the more hawkish side of expectations," said Steven Barrow, the head of G-10 strategy at Standard Bank.

Data later this week are expected to show consumer prices accelerated further. The pound was largely unchanged on the day at US$1.2231. It fell to as low as US$1.1934 on Jun 14, the lowest since March 2020.

Money market traders raised their wagers for how much more tightening the BOE will deliver this year, pricing about 188 basis points of hikes, compared with 184 basis points on Friday (Jun 17).

Investors also rushed to offload the longest gilts to make room for a sale of 50-year debt via banks, which is expected sometime this week according to the UK's Debt Management Office. Yields on 30- and 50-year bonds both jumped around 12 basis points, the most this month.

The Fed delivered an usually large 75 basis-point hike last week taking the funds rate to a target range of 1.5 to 1.75 per cent. The BOE increased rates by 25 basis points to 1.25 per cent.

Mann was among 3 BOE policy members who voted for a larger 50 basis-point increase. BLOOMBERG

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