UK gilt yields head for biggest one-week fall since 2023

LONDON, May 22 (Reuters) - Medium and long-duration British government bond ​yields ⁠were on course for their biggest one-week ​fall in almost two and a half years on Friday as investors responded to mounting signs of ​an ‌economic slowdown.

Having risen sharply last week to their highest in decades on worries about the turmoil ⁠within the governing Labour Party, yields on 10-, 20- ⁠and 30-year gilts were down by ​around 27 basis points since last Friday, the biggest one-week drop since December 2023.

Yields on gilts of those durations were down by about 4 basis points on the day, in line ​with a ‌fall in yields on equivalent German debt although the drop in bund yields over the week was about a third of that for gilts. Official data published on Friday showed a bigger-than-expected fall in retail sales volumes in April after a plunge in purchases ​of fuel by drivers in response to a jump in prices caused by the Iran ‌war. Other figures released this week have shown a surprisingly low inflation reading for last month, a fall in hiring and the ‌most widespread drop in business activity in over a year. Bank of England Governor Andrew Bailey said on Tuesday the rise in market interest rates since the start of the ​Iran war has given the central bank time to assess the economic impact of the conflict and he ‌pointed to a weaker growth outlook.

Investors on Friday were pricing around 48 basis points of BoE monetary policy tightening by the end of the year, equivalent to less than two ⁠quarter-point hikes.

Mark ⁠Dowding, chief investment officer at RBC's BlueBay Asset Management, said ‌assurances on borrowing by the person most likely to replace Keir Starmer as prime minister - Manchester Mayor Andy Burnham - ​had been welcomed ​by investors.

But "he remains committed to raising taxes and spending in ‌a material way and we are very sceptical that this will go smoothly, if he does end up in 10 Downing Street later this summer," Dowding wrote in a note for clients.