LONDON, Aug 5 (Reuters) - British two-year government bond
yields rose to a one-month high on Wednesday, a day
before the Bank of England is expected to keep its key interest
rate on hold and confirm a slowdown in the pace of gilt
purchases.
British 10-year government bond yields struck a
record low of 0.065% on Tuesday, but two-year borrowing costs
are clear of the all-time low of -0.130% they plumbed on July
14, reaching a high of -0.044%.
Relative to German two-year bonds, gilt yields
are their highest since early June.
Short-dated gilt yields have been pushed below zero by a mix
of speculation that the BoE could cut the Bank Rate below zero,
BoE bond purchases, and global concerns about a second
coronavirus wave that would derail economic recovery.
None of the 68 economists polled by Reuters expect the BoE
to cut rates this month, and Citi fixed income strategist Jamie
Searle said he did not expect a clear signal from the BoE that
it is willing to take rates below zero if needed in future.
"Ambiguity or delay is most likely in our view, likely
leaving the front-end unmoved," Searle said.
Governor Andrew Bailey has said negative rates are under
consideration - in contrast to his predecessor Mark Carney's
opposition - but the BoE has not decided if they would boost
demand or be practical for Britain's banking system.
The BoE will have to give more clarity on how much the
current pace of asset purchases will slow.
In June it approved a further 100 billion pounds ($131
billion) of asset purchases, taking the total to 745 billion
pounds. But it said these purchases would need to last until the
turn of the year.
Currently the BoE is buying 6.9 billion pounds of gilts a
week, down from 13.5 billion pounds when it relaunched its asset
purchase programme in March.
Citi said it expected the BoE to announce that weekly
purchases, including the reinvestment of maturing gilts, would
drop to 4.4 billion pounds - below the rate at which the Debt
Management Office is issuing new debt.
"For the curve, this creates steepening vulnerability unless
the BoE spells out that QE will be upsized on any fresh issuance
shock," Searle said.
($1 = 0.7624 pounds)
(Reporting by David Milliken; editing by Barbara Lewis)