Rates · R10 · 7 min
What moves rates: event days
Say which news moves short-term yields and which moves long-term ones, and split a day’s move into rate expectations and everything else.
In the news: “Gilts sold off on Budget day while bets on Bank Rate barely moved”: how to tell what drove a move in yields.
The essentials
- The front end
- The 2-year sits close to the average expected over the next two years, so rate decisions, inflation figures, wage growth and jobs data move it first.
- Surprises against pricing
- Prices already hold what traders expect. A fully priced 25 cut barely moves 2-year yields; the gap between the outcome and what was priced does, along with hints about the next decision.
- Hawkish and dovish surprises
- A surprise lifts short yields most: a bear . A one lowers them most: a bull . Strong US payrolls usually bring a bear flattener in Treasuries.
- The long end
- Long yields also carry , so Budgets, borrowing plans and auctions move them. Heavier long borrowing usually brings a bear steepener; in September 2022 the 30-year yield rose 130bp in three days of trading.
- Splitting a move
- Read the 2-year move as the change in expected policy rates and the rest of the 10-year move as term premium and other factors: 2-year up 3bp and 10-year up 14bp leaves 11bp that isn’t about the central bank.
A rough split of a 10-year move
Δ10y = Δ2y + Δ2s10s
- Δ10y
- change in the 10-year yield, bp
- Δ2y
- change in the 2-year yield: the expected path of Bank Rate
- Δ2s10s
- change in the gap between them: term premium and other factors
How it works
1. The 2-year follows the central bank
A 2-year gilt’s yield is close to the average investors expect over the next two years. So news that changes that expectation moves it first: rate decisions, inflation figures, wage growth and jobs data. Strong data makes rate rises likelier, so 2-year yields go up.
2. Surprises move markets, not news
Prices already contain what traders expect. If the market is certain of a 25bp cut and the Bank cuts 25bp, 2-year yields barely move. What moves them is the gap between what happened and what was priced, and any hint about the next decision.
3. Hawkish and dovish surprises
A surprise, a central bank sounding keener to raise rates than expected, lifts short yields most: yields up and the curve flatter, a bear flattener. A surprise, keener to cut, does the opposite: short yields fall most, a bull steepener.
4. The long end has more drivers
10- and 30-year yields also reflect expected Bank Rate, but they carry too: the extra yield investors want for locking money away for decades. That brings in news the 2-year ignores: Budgets, government borrowing plans, auctions and pension fund demand.
5. Fiscal shocks steepen the curve
Much bigger borrowing lifts long yields more than short ones: a bear steepener. The extreme case was September 2022: by 28 September the 30-year gilt yield had risen 130bp in three days of trading, as , which used borrowed money to hedge pension schemes, were forced to sell, and the Bank of England stepped in to buy long gilts.
6. Splitting a move
To read a day, treat the 2-year move as the change in expected Bank Rate and the rest of the 10-year move as term premium and other factors. If the 2-year rises 3bp and the 10-year 14bp, about 3bp is rate expectations and 11bp is the rest: a story about supply or risk, not the Bank.
Try it
Set the 2-year and 10-year moves from an event day: a hawkish surprise lifts the 2-year most, a borrowing scare the 10-year. The curve is made up for illustration.
Bull steepener2s10s +65bp (from 40bp)
Worked example
On a made-up Budget day, the Chancellor raises planned borrowing and most of the extra gilts are long-dated. By the close, 2-year gilt yields are up 3bp and 10-year yields up 14bp.
- Rate expectations: the 2-year rose 3bp, so about 3bp of the 10-year move is expected Bank Rate.
- The rest: 14 − 3 = 11bp, from term premium and supply.
- Share: 11 ÷ 14 is about 80% of the move.
- Curve: both yields up and 2s10s 11bp wider, a bear steepener driven by the Budget.
About 3bp of rate expectations and 11bp of term premium and supply: a bear steepener.
Check yourself
6 quick questions on the explanation above.
Practice
New numbers every set. Misses and guesses go into your review deck.
In the interview
Answer out loud in under a minute, then compare.
Gilts sold off while Bank Rate expectations didn’t move. What else could be going on?
What would you watch on Budget day?
Walk me through how US payrolls move the Treasury curve.
Remember
Δ10y ≈ Δ2y (rate expectations) + Δ2s10s (the rest)
Central-bank news moves the front end most; borrowing, supply and term premium move the long end.
Sources
Definitions and maths are standard textbook material; dated facts link to the sources above. Worked numbers are illustrative.