Short-dated UK government bonds surged after the Bank of England held interest rates steady and dampened speculation that it was preparing to hike again.
Yields on two-year gilts dropped as much as 12 basis points to 4.33%. In his press conference, Bank of England Governor Andrew Bailey told attendees not to assume policymakers were leaning toward tighter policy. Traders subsequently trimmed their expectations for rate increases, pricing in 33 basis points of tightening by December, down from 38 basis points before the decision.
Ten-year gilt yields fell 5 basis points at one stage to 4.98%. With the steeper drop in the short end, the spread between two-year and ten-year yields widened to a three-week high, producing a bull steepening of the UK yield curve.
Short-dated German Bunds also moved higher, tracking gains in US Treasuries. The two-year German yield declined 3 basis points to 2.78%, while the ten-year yield edged 1 basis point higher, causing a similar curve steepening. This followed the Federal Reserve's decision to hold rates steady on Wednesday, which cooled market expectations for US rate hikes.
Market snapshot: Germany's 10-year yield rose 1 basis point to 3.17%; the 10-year Bund futures contract fell 18 ticks to 124.60; Italy's 10-year yield eased 1 basis point to 3.99%; the spread between Italian and German 10-year yields narrowed 1 basis point to 82 basis points; France's 10-year yield was little changed at 3.96%; and the 10-year UK gilt yield dropped 3 basis points to 5.00%.
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