Gilt yields soar to highest since October 2011

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Yields on 10-year UK government bonds have climbed to their highest since October 2011 after data showed inflation remains above target.

Investors are also concerned that the Bank of England will lift interest rates sooner than expected, as evidence of the UK’s economic recovery starts to firm.

The yield on 10-year gilts rose above 2.6 per cent yesterday, which is the highest level seen since 28 October 2011, before easing back slightly by the end of the session.

The rise followed Office for National Statistics numbers which showed that consumer prices index inflation fell to 2.8 per cent in July – down from 2.9 per cent in June but remaining above the Bank of England’s 2 per cent target.

Meanwhile, the Royal Institution of Chartered Surveyors said an index of UK house prices rose to 36 points in July, up from 21 in the previous month. The report of rising house prices may have sapped demand for fixed-income assets.

ING Groep head of developed-market debt strategy Padhraic Garvey told Bloomberg: “There’s clear evidence that growth is here, looking at economic surveys, inflation growth and house-price inflation. That’s all negative for gilts.”

The rise came despite Bank of England governor Mark Carney committing to forward guidance last week, saying the monetary policy committee will not consider lifting the base rate until unemployment falls to 7 per cent – unless inflation spikes or threats to financial stability emerge.

Pimco head of sterling funds Mike Amey told the FT: “Since the Bank started ‘forward guidance’, the market response has not been as they would have expected. They may have to make it more explicit – or think of something different.”