Gilts hit in intensifying bond sell-off

Investors pushed UK 10-year yields above 2 per cent on Wednesday for the first time since December as a global bond sell-off heightens market anxiety ahead of a highly uncertain election.

The milestone came after a bout of selling on Tuesday when UK markets retuned from their early summer public holiday.

Gilt prices fell in tandem with a sell-off across US and European government debt markets, cooling a rally that has accelerated with the European Central Bank's decision to buy bonds to boost the flagging eurozone economy.

Indications of economic revival and rising inflation expectations linked to a jump in oil prices to $68 a barrel have eroded the appeal of bonds, chipping away at the value of fixed income.

Prices across European and US government bond markets have fallen sharply, pushing yields up. The yield on 10-year German Bunds, which hit a record low of 0.05 per cent earlier this year, rose to 0.59 per cent on Wednesday morning, the highest point of the year so far.

Investors said a larger sell-off in bond markets could be on the cards.

"We have been arguing for some time that the German Bund yield level is unsustainable in the medium term," said Markus Allenspach, head of fixed income research at Julius Baer. "Yields are still below their fair value in the euro area."

Gilts could be particularly exposed amid a growing sense of unease in markets with just one day of campaigning to go before polling on Thursday in the closest UK general election in a generation.

With neither the Conservatives nor Labour expected to secure an overall majority in the House of Commons, voting is likely to be followed by a round of coalition building, a process expected to be complicated by the rise of the anti-EU UK Independence party and the Scottish National party.

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"A minority Labour government supported by the SNP would likely lead to a sell-off on increased uncertainty and the potential for earlier rate rises," said Jacob Nell, economist at Morgan Stanley.

"A Conservative or Labour government of the traditional parties would likely trigger a gilt market rally."

Nour Al-Hammoury, chief market strategist at ADS Securities, said: "The UK's cloudy political outlook is leaving it exposed at a time when more general sentiment toward government bond markets is souring - we expect gilts to remain volatile."

Meanwhile, sterling was looking calmer after showing signs of renewed volatility on Tuesday. The pound slipped 0.1 per cent on Wednesday to $1.5189.

Stock markets also remained sanguine. The FTSE 100 was up 0.2 per cent at 6,939.47, while the mid-cap FTSE 250, considered more representative of the domestic UK economy, slipped 0.2 per cent to 17,412.50.

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