The Bank of England’s governor, Andrew Bailey, noted that the UK’s yield curve is steepening in line with global trends. This steepening is due to uncertainties in trade and fiscal policies. Recent figures reveal that the UK’s public sector net borrowing rose to £20.7 billion in June, the second-highest June figure on record. Only the borrowing levels during the Covid pandemic were higher. With rising yields and ongoing inflation, Chancellor Rachel Reeves faces more pressure as she prepares for the autumn Budget.

Market Expectations

The governor’s comments reflect what the market has been anticipating for weeks. His acknowledgment of trade and fiscal policy uncertainties supports the idea that the long end of the UK yield curve is at risk. This indicates continued pressure on long-term government bonds, known as Gilts. Given this situation, we believe it makes sense to prepare for further steepening of the Gilt curve in the coming weeks. Derivative traders can act on this by buying ten-year Gilt futures while also selling two-year Gilt futures. The uncertainties Bailey mentioned should lead to a wider gap between these two points on the curve. The increase in government borrowing intensifies this trade. The UK’s Debt Management Office plans to issue a hefty £277.7 billion in Gilts for the 2024-25 fiscal year, which will likely push long-term yields higher due to the large supply. This fundamental shift from fiscal policies supports the technical case for a steeper curve.

Inflation Concerns

Persistent inflation, particularly in the services sector—which recently reported 5.7%—adds difficulty to the Bank of England’s role and increases market volatility. While overall inflation has reached the 2% target, these underlying pressures create uncertainty for short-term rates. We recommend considering options on interest rate futures to benefit from anticipated price fluctuations. This level of borrowing, outside of a crisis, is historically significant, reminiscent of the aftermath of the 2008 financial crisis, which led to long-lasting uncertainty. All attention will now be on the Chancellor ahead of the Autumn Statement for hints of fiscal responsibility. Any move away from fiscal prudence could speed up the steepening of the curve we are preparing for. Create your live VT Markets account and start trading now.

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