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UK yields set for big weekly jump

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Sterling lower even as traders pare back rate-cut bets

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Scale of bond, pound moves still far short of Sept 2022

rout

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Markets calmer on Friday, some investors see opportunities

(Updates with comments from paragraph 13; refreshes prices at

1131 GMT)

By Yoruk Bahceli, Amanda Cooper and Harry Robertson

LONDON, Nov 1 (Reuters) - Short-term British government

borrowing costs headed for their biggest weekly jump in over a

year on Friday, while the pound faced its longest stretch of

weekly losses in six years as Labour's tax-and-spend budget

raised inflation expectations.

Two-year gilt yields, which led the selloff as

investors pared back rate cut expectations, have risen 26 basis

points on the week, set for their biggest weekly increase since

June 2023.

Benchmark 10-year yields were up 21 bps, the

biggest weekly move this year, having touched their highest in a

year on Thursday at 4.526%.

Yields however dipped on Friday and sterling edged higher,

suggesting investor sentiment was calming.

While the surge in government borrowing costs and the drop

in the pound are sizable, the speed and scale are far short of

the crisis that rocked markets in September 2022 following

then-Prime Minister Liz Truss's budget of billions in unfunded

tax cuts.

"2022 was something really quite off the scale. But that

doesn't mean that what we saw this week wasn't important," City

Index market strategist Fiona Cincotta said.

Yields have jumped as markets digest the government's plans,

which will add nearly 70 billion pounds a year to the public

spending bill, according to Britain's fiscal watchdog, with just

over half covered by higher taxes and the rest by increased

borrowing.

The UK's Office for Budget Responsibility now expects

inflation will average 2.6% next year, compared with a previous

1.5% forecast.

Traders expect less than 90 bps of rate cuts by the end of

next year, having priced in well over a percentage point prior

to the budget.

They still expect a rate cut at the Bank of England's

meeting next Thursday but have reduced the chance of a December

cut to less than 50%.

Some investors said the moves may be exacerbated by

positioning shifts, with many investors having favoured gilts

before the budget.

BNP Paribas Asset Management told Reuters it had closed its

overweight position in gilts, while Artemis is selling 10-year

gilts following the budget.

BUYING OPPORTUNITY

Investors including Lazard Asset Management and AXA

Investment Managers reckon gilts look attractive with higher

yields.

"It doesn't strike us as an irresponsible budget," said

AXA's head of total return and fixed income Nick Hayes.

"When I speak to the investment banks, they talk about

decent buyers of gilts across the curve... you're not seeing any

panic selling."

Rabobank said on Friday the market reaction had been

"overdone," with the OBR expecting Britain's deficit, based on

current spending and revenue, to turn to a surplus in four

years.

Sterling edged up 0.3% against the euro on

Friday, though it was still headed for its biggest one-week

slide against the single European currency in more than a year,

down by 1%.

Against the dollar, it was steady on the day at

$1.291, but down 0.4% on the week, set for its fifth weekly

decline - the longest such stretch since late 2018.

The currency falling as markets reduce rate cut bets shows

the budget is not being seen as good for growth, City Index's

Cincotta said.

The OBR revised up growth projections modestly for this year

and next, but lowered them for 2026-2027.

Investors are sitting on one of the largest bullish

positions in sterling on record., worth $6.05

billion and the biggest bet against the dollar among the major

currencies, according to the most recent weekly data from the

U.S. markets regulator, making it vulnerable to further drops.

The derivatives market shows traders are more willing to pay

more for options to sell sterling rather than buy it than at any

time in the last 16 months.

"We like short GBP even more given its limited move so far,"

Neil Mehta, portfolio manager at BlueBay Asset Management, said.

For the time being, UK bonds were likely to remain jittery,

with the U.S. presidential election taking place next week.

"We anticipate high volatility in global rates markets next

week, which could be even more pronounced in gilts," Lazard

Asset Management's co-head of global fixed income Michael

Weidner said.