Steepening yields boost London-listed banks

Financials led the way in the City today as a steepening in global yields boosted sentiment to banks and fund managers.

London’s premier FTSE 100 index climbed 0.37 per cent to 7,629.22 points, while the mid-cap domestically-focused FTSE 250 index, which is more aligned with the health of the UK economy, closed 0.58 per cent higher at 21,084 points.

Yields on UK government debt have climbed sharply to nearly two per cent as a result of traders betting on the Bank of England hiking interest rates for the fourth meeting on 5 May.

Borrowing costs are already back to pre-pandemic levels of 0.75 per cent.

Traders have ditched bonds on predictions that the world’s top central banks will plough ahead with one of the quickest tightening cycles in recent history to tame rampant inflation.

High street banks NatWest, Barclays, HSBC and Lloyds were among the top performers on the FTSE 100, gaining more than 2.12 per cent.

Elevated interest rates support banks by widening their net interest margin, a key source of income for the sector.

Yields move inversely to prices. If investors think interest rates will be higher in the future, holders of bonds tend to have to offer them at a lower price to attract buyers, which sends returns higher.

A higher interest rate environment in theory weighs on equity markets as it makes fixed assets more attractive and discounts companies’ future cash flows.

Yields on 10-year US Treasuries, seen as the global benchmark for interest rates, have also steepened and are now nearing three per cent.

The US Federal Reserve is anticipated to hike rates 50 basis points at its next meeting, breaking with its tradition of moving borrowing costs in 25 basis point increments.