U.K. Yield Curve Steepens as Scots Poll Delays Bets on Rates

The extra yield investors get holding 30-year U.K. bonds instead of debt maturing in two years widened by the most in three weeks after poll showed Scottish nationalists led in their bid to break away.

Two-year securities advanced amid speculation that a Scottish vote next week to exit the U.K.’s 307-year-old union will prompt the Bank of England to delay interest-rate increases as politicians deal with the fallout and economic uncertainty that may delay investment. Longer-term gilts slipped with the pound after a poll by YouGov Plc showed the Yes campaign gained a lead for the first time this year before the Sept. 18 vote.

“It’s as much about the economic uncertainty damping the prospect of rate increases and that is supporting the short end,” said Robin Marshall, director of fixed-income at Smith & Williamson Investment in London, which manages about $25 billion. “On the other hand, there might be a concern about risk premium and capital flight. There could be a bit of curve steepening until the uncertainty is out of the way.”

A yield curve is a chart showing rates on bonds of different maturities.

The yield spread between two- and 30-year gilts increased eight basis points, or 0.08 percentage point, to 237 basis points as of 5:02 p.m. London. That’s the biggest widening since Aug. 13. The gap between two- and 10-year rates increased five basis points to 171 basis points, having reached the widest since Aug. 18.

Sonia Shifts

Two-year note yields fell four basis points to 0.77 percent while those on the 3.25 percent gilt maturing in January 2044 rose four basis points to 3.14 percent.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors pushed back bets on a 25 basis-point increase in borrowing costs to August from as early as February last month.

The question of whether a go-it-alone Scotland will be able to keep the pound in partnership with the remaining parts of the U.K. has dominated the independence debate with all the major parties in London saying they would oppose it. Scottish First Minister Alex Salmond has said that they would change their view once negotiations began in the event of a vote favoring independence. He has said Scotland would refuse to pay its share of the U.K. national debt if they didn’t give in.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE