British government borrowing costs jumped on Thursday to their highest level in more than a month after Prime Minister Boris Johnson installed a new finance minister, who investors think will be more free-spending than his predecessor.
Earlier, Johnson forced the resignation of Sajid Javid as finance minister and replaced him with his deputy Rishi Sunak, a loyal supporter of the prime minister.
The news sent the pound rising past $1.30 for the first time in a week as investors bet that Sunak would readily obey Johnson’s wishes to vastly increase government spending – which by extension would reduce pressure on the Bank of England to cut interest rates.
The overnight index swap market now prices in only a 9% chance of an interest rate cut at the BoE’s next meeting in March, compared with around 17% at the start of the month.
The 10-year gilt yield struck its highest level since Jan. 21 as of 1449 GMT, up 5 basis points on the day.
The two-year gilt yield also hit its highest since Jan. 10 at 0.578%.
“Given his majority and fewer people to challenge him, the PM should be able to make decisions much quicker but it does mean we anticipate more spending than expected,” David Zahn, head of European fixed income at fund manager Franklin Templeton.
“Overall, the direction of travel for the government is clear and this reinforces our view that gilt yields should rise as more is revealed about the upcoming budget.”
Sunak is due to deliver the first budget under Johnson’s administration on March 11.
The yield spread between 10-year British and German government bonds jumped to 103.6 basis points, its widest since Jan. 10 and up 5 bps on the day.
March long gilt future 133.29 (-0.47)
June 2019 short sterling 99.325 (-0.01)
Dec 2020 short sterling 99.36 (-0.02)
10-year gilt yield 0.66 (+4.2 bps)
Source: Yahoo Finance UK