European Bond Markets: Fiscal risks drag UK gilts lower and underperform peers
The U.K. government bond yield curve steepened sharply after Prime Minister Burnham said he would use the flexibility in U.K. fiscal rules, raising concerns that government borrowing could rise during his term in office. Previously, the bond market was already under pressure as the intensifying conflict between the United States and Iran drove oil prices to jump. The yield on 30-year British government bonds rose 9 basis points to 5.75%, a two-month high; the 30-year swap spread narrowed 1 basis point to negative 68 basis points. Traders are betting the Bank of England will raise interest rates by 42 basis points this year, up from 43 basis points last week. German government bonds and other similar bonds in the euro zone edged lower, with the yield curve steepening; the money market is still betting that the European Central Bank will raise interest rates by 1 basis point this week, but has reduced its bets on further tightening policy. It is currently expected to raise interest rates by 44 basis points by the end of the year, down from the previous 46 basis points. German 10-year government bond yields rose 2 basis points to 3.15%; German Bund futures fell 25 points to 124.80; Italy's 10-year government bond yield rose 2 basis points to 3.97%; The spread between Italian and German government bonds was basically flat at 82 basis points; The French 10-year government bond yield rose 1 basis point to 3.94%; The 10-year UK government bond yield rose 8 basis points to 5.03%.