UK 10-year bonds see record monthly fall after fiscal upset

LONDON (Reuters) - Many British government bonds ended September with their biggest calendar-month fall on record, as a modest rally on Friday failed to offset the hit from rising global interest rates and a sharp loss of confidence in the government's budget policy.

Ten-year British government bond yields - which move in the opposite direction to prices - eased by 3 basis points on the day but have rocketed 1.31 percentage points on the month, the biggest jump in Refinitiv and Bank of England data going back to 1957.

GRAPHIC-UK 10-year gilt yield rises by most on record in

September

The picture is similar for most other maturities on data going back to the 1980s, with the exception of two-year and 30-year yields, which suffered a sharper sell-off in May 1994 during what was dubbed "The Great Bond Massacre".

Government bond prices worldwide have been under pressure from the highest inflation in decades, bringing with it expectations of rapid central-bank tightening.

But British bond prices got an extra kick lower last Friday, after new finance minister Kwasi Kwarteng set out a programme of unfunded tax cuts and other spending measures, and further damaged confidence by not publishing independent forecasts alongside them.

Sterling fell to a record low against the U.S. dollar below $1.04 in the early hours of Monday, and by Wednesday the Bank of England was forced to intervene in the gilt market to stop panicked selling of long-dated bonds by pension funds.

Ten-year gilt yields stood at 4.11% at 1530 GMT while 30-year yields fell 16 basis points on Friday to 3.80%, after hitting a 20-year high of 5.092% on Wednesday before the BoE intervened.

British 10-year bonds' slump this month has been the largest of any major economy since an even bigger tumble in Japanese government bonds in 1987.

However, analysts are not convinced that British government bond prices have yet found their floor.

"With the government showing few signs of heeding markets' message, further instability remains a significant risk," Oxford Economics said in a note to clients on Friday.

NatWest Markets predicts 10-year yields will rise to 5% early next year, a level last seen in July 2008.

"Although the BoE's interventions to purchase long-dated gilts ... may help to restore a sense of composure in otherwise very volatile markets, it does not materially alter the medium-term outlook," head of rates strategy Imogen Bachra said.

The BoE's commitment to buy up to 5 billion pounds each day of gilts with a maturity of at least 20 years ends on Oct. 14, and on Oct. 31 it aims to restart the programme of gilt sales it was forced to suspend earlier this week.

BoE chief economist Huw Pill has said significant tightening is likely to be needed at the BoE's November meeting - when markets expect Bank Rate to jump to 3.5% from 2.25% - and swap markets price in rates of close to 6% by May next year.

(Additional reporting by Andy Bruce; reporting by David Milliken; Editing by Raissa Kasolowsky)

By David Milliken