Bond yields hovering around a ten-year high, UK bond market gets a breather opportunity.

Noticeably, for British bond and currency traders, a busy week is coming to an end with yields hovering near the highest levels in years and the pound approaching its lowest levels since the end of 2023. The British bond market opened slightly weaker on Friday, in line with peers, continuing the relatively calm tone from Thursday afternoon. The pound fell 0.2% to $1.2290, while the yield on 10-year UK government bonds rose 2 basis points to 4.83%. Concerns about the UK's public finances and ongoing inflation have led to significant selling in the stock market this week, reminiscent of the market crash two years ago that led to the downfall of the Tras government. The yields on UK 10-year and 30-year bonds have risen by more than 20 basis points in the past five trading days, marking the largest increase in a year. Although many investors believe that this sell-off may have been overdone, cautious sentiment still prevails. Morgan Stanley strategist Fabio Bassanin wrote in a report: "The upcoming budget, changes in fiscal policy and interest rates might need to become clearer for UK bond demand to sustainably recover. Given these broader dynamics, we recommend investors remain cautious on UK rates." British officials are trying to reassure the market. Chief Secretary to the Treasury, Darren Jones, stated that the UK government bond market is operating "orderly," and then Deputy Governor of the Bank of England, Sarah Breedon, expressed a willingness to further lower interest rates. This is a positive sign for large investors including The Pacific Investment Management Company, Franklin Templeton, and Fidelity International, who still maintain a bullish outlook on UK government bonds. Some investors even plan to buy more bonds. However, the situation remains dire for the Labour government. Rising borrowing costs could erode the steadily decreasing 99 billion ($122 billion) fiscal space. Chancellor of the Exchequer Rachel Reeves may be forced to tighten fiscal policy, potentially leaning towards further cuts in public spending rather than raising taxes. Deutsche Bank strategists Henry Allen and Jim Reed wrote in a report: "Weak economic growth and inflation above target have exacerbated investor nerves. The current market trends, with rising bond yields and a falling pound, are reminiscent of previous periods of turmoil."