UK 30-year yields hit highest since 2002, extending post-tax cuts surge

LONDON (Reuters) -Yields on British government debt surged to new multi-year highs on Tuesday, led by 20 and 30-year bonds, adding to their steep climb since finance minister Kwasi Kwarteng announced sweeping tax cuts last week.

Thirty-year gilt yields soared to their highest since 2002, ending the session a whisker below 5%, roughly double their level in August and up by almost half a percentage point on Tuesday alone.

Yields on 20-year gilts were up by 35 basis points while the 10-year gilt extended its climb and remained on course for its biggest rise in any month since at least 1957.

Returns demanded by investors from holding government bonds in many rich economies have risen swiftly in recent weeks on worries about surging inflation.

But the jump has been particularly sharp in Britain where new Prime Minister Liz Truss has promised to end the economic policy “orthodoxy” by cutting taxes in an attempt kick-start growth, adding to the country’s already high debt levels.

Tuesday’s rise in British gilt yields accelerated around the time the Bank of England’s chief economist, Huw Pill, said the BoE was likely to deliver a “significant policy response” to the government’s huge tax cuts but should wait until its next scheduled meeting in November.

Some investors and economists have said the British central bank should hold an emergency meeting now and deliver a big interest rate hike to prop up the value of the pound and avoid further inflation pressure.

Interest rate swaps now price in only a modest chance of an emergency BoE rate hike in the next few weeks, but suggest the BoE will raise rates to 3.5% or even 3.75% at its next meeting, up from 2.25% now. Bank Rate is seen reaching 6% by March next year.

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