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(Bloomberg) — UK government borrowing costs reached their highest level since 2008, as traders ramped up wagers on interest rate hikes this year due to surging energy costs.
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The benchmark 10-year bond yield rose as much as 10 basis points to 4.94%, the highest since the global financial crisis nearly two decades ago. Shorter-dated yields surged by even more on Friday.
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The fear coming from the bond market is that policymakers will be forced to raise borrowing costs to keep inflation under control as energy prices skyrocket because of the war in the Middle East. All nine members of the Monetary Policy Committee voted to leave the key rate unchanged at 3.75% on Thursday, with Bank of England Governor Andrew Bailey warning that policy must “respond to the risk of a more persistent effect on UK CPI inflation.”
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“With rising inflation expectations and a more hawkish Bank of England to already contend with, the last thing gilt investors want to see is the government weakening the fiscal guardrails from a position of such weakness,” said James Athey, fund manager at Marlborough Investment Management.
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“Markets are struggling to find their feet with volatility and correlations all over the shop, as you would expect in a scenario of shock and hyper uncertainty,” he added.
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Traders added to wagers on the extent of BOE hikes this year on Friday, with 87 basis points now priced for the whole year. That’s equivalent to three quarter point moves, and about a 50% chance of a fourth. It’s a huge swing from three weeks ago, when confidence was running high that the BOE would cut at this week’s meeting on a weakening labor market.
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Shorter dated notes are taking the brunt of the selloff, with the two-year yield rising one percentage point since the start of the war in late February. It was 13 basis points higher at 4.53% on Friday.
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Brent Crude was trading 1.6% higher on Friday with prices above $110 a barrel.
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—With assistance from James Hirai.
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(Updates with context, comment.)
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