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UK 2-Year Yield Rises to 5% for First Time in 15 years

Hillary Opondo Jun 22, 2023

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Britain’s short-term government interest rate rose to 5% amid a high inflation outlook. The increase marked the first one since the 2008 global financial crisis, calling for more aggressive moves by policymakers seeking to tighten monetary policy. In any case, the 2-year bond yield is one of the sensitive rates to central bank policy changes. It rose by about six basis points, marking the most concerning level in nearly 15 years.

Meanwhile, the Bank of England will announce its new policies on Thursday. The ONS will also release the crucial inflation data on Wednesday. Britain's government bonds have remained among the worst-performing top peers through 2023. The 2-year bond yields rose to more than 140 basis points, surpassing its peak during the controversial spending plans from former Prime Minister Liz Truss. Experts in UK rate markets believe there is no specific near-term trigger to help control the recent cheapening.

On the other hand, marginal investors say that headlines about attaining post-mini-budget highs might raise questions instead of raising demand. But some investors overlook the impacts of these headlines. The core inflation rate (it strips out volatile components) will likely hold steady at one of the highest levels in over forty years. However, analysts have forecasted that the number could slow slightly in May. This risk prompts a hawkish response from the government to lower consumer prices.

Traders believe the oncoming Bank of England meeting would raise the borrowing costs by a quarter point. 20% of the analysts predicted the meeting could announce a more significant half-point move. Overall, they expected the money markets policy rate to attain a 5.75% peak by the end of 2023 and a 50% chance of a 6% final raise by early next year. These higher borrowing costs are filtering through other economic sectors.

The average 2-year home loan fixed rate rose to 6% for the first time. Generally, the 2008 financial crisis deeply impacted the housing market, leading to foreclosures & evictions in months. Thus, the stock market plummeted, and worldwide businesses lost millions or failed. It resulted in extended unemployment periods and widespread layoffs. But how did it begin? Banks started lending recklessly, which resulted in the inevitable bundling of high-risk loans that passed down the line.

As the high-risk loan bundles increased, lending firms faced financial difficulties. The aftermath called worldwide financial conditions dismissal from 2008 to 2009. The falling financial stability confidence and declining credit availability resulted in more cautious & fewer investments. While international trade dropped, the 2009 American Recovery & Reinvestment Act provided an expansionary monetary policy that worked towards stimulating growth and facilitated bank mergers & bailouts.

Hillary Opondo

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