UK-German 2-year bond yield spread hits 10-year high

The two-year UK-German bond yield spread rose to 122.7 basis points on Friday; its highest level since August 31, 2007.

The spread hit a low of 80 basis points in April this year. Since then, it has been rising steadily as the spike in UK inflation meant the Bank of England (BOE) would have to hike rates before the ECB.

The BOE is widely seen raising rates this week. Meanwhile, the ECB announced a dovish taper (lower for longer QE) last week.

Also pushing the yield spread higher was Catalan crisis and the resulting haven demand for German bunds. (yields dropped).

The rising UK-German 2 year yield spread indicates the EUR/GBP cross (currently at 0.8837) could extend the drop to 0.8754 (200-day MA).