The UK Government Bond Market Is Becoming Unreadable

Pity portfolio managers trying to manage their sterling interest-rate exposure. The 10-year UK government bond yield has surged by 100 basis points in the past month, climbing to levels commensurate with the autumn gilt crisis. The yield premium of UK debt to German bunds has doubled since early February,  while 10-year gilts have gone from trading 50 basis points beneath their US Treasury equivalents to the same amount above. And I blame the Bank of England for this very specific UK problem.

Repeated market lurches as fund managers race to re-hedge their interest-rate risk are damaging the health of the UK bond market. Analysts at Schroders Plc point out that 30-year inflation-linked gilt yields above 1% are a sign stress might continue. They cite rising global rates, the end of the central bank’s crisis gilt-buying program, increased bond supply and muted demand from pension schemes as contributing factors.