By Andy Bruce and David Milliken
LONDON (Reuters) - Bond investors were unconvinced by British Prime Minister Liz Truss's partial reversal of her economic plan on Friday, as gilts gave up early gains to end the day down sharply, especially for long-dated bonds.
As of 1546 GMT, long-dated gilt yields were more than 20 basis points up on the day, having fallen almost 30 basis points in early trading - another huge intraday swing that underlines the volatility facing gilt market players.
While U.S. and German government bonds also erased their gains during the day, long-dated British debt again underperformed: a clear verdict on Truss's statement after she sacked her finance minister, Kwasi Kwarteng.
Sterling also fell against the dollar as Truss announced that corporation tax would rise to 25% as intended by her predecessor Boris Johnson, reversing her earlier plan to freeze it at 19%.
Some investors were betting that she would go further in reversing the 45 billion pounds of unfunded tax cuts in Kwarteng's Sept. 23 mini-budget, around 20 billion pounds of which she has unwound.
Bond strategists warned that gilts were still in for a bumpy ride - especially after the Bank of England concluded its emergency gilt market support on Friday.
"The chancellor is gone, and questions are being asked about the PM's future. Markets have a long weekend of cloaks and daggers to look forward to," said Antoine Bouvet, rates strategist at ING. "The gilt market may still need some central bank support, 10-year gilt yields below 4% aren't sustainable until then."
The 10-year gilt yield, having fallen as low as 3.899% in early trade, was on track to close at 4.33%, up 13 basis points on the day - a huge intraday swing.
"I don't see how that press conference will have done much to shore up the appeal of UK PLC to foreign investors," said Richard McGuire, head of rates strategy at Rabobank. "You see that with the weakness of sterling ... I would expect gilts and the pound to remain under pressure going forward."
Thirty year gilt yields looked on track to close around 25 bps up on the day at 4.79%, having fallen as low as 4.244% in early trade. It was a similar story for the 20-year gilt.
Rate futures priced in a roughly 60% chance that the Bank of England will raise interest rates by 75 bps to 3% on Nov. 3, having earlier this week fully priced in a bigger increase to 3.25%. Bets on a peak for rates to hit 5.5% next year were no longer fully priced in.
Friday was the last scheduled day for the BoE's temporary purchases of government bonds.
The BoE bought 1.45 billion pounds ($1.62 billion) of long-dated and index-linked gilts - a modest finale for the programme that started on Sept. 28 to halt a fire sale of assets by liability-driven investment (LDI) funds widely used in Britain's pensions industry.
LDI funds had been hit hard by the record slump in long-dated gilt prices after Kwarteng's mini-budget.
The BoE's purchases of gilts totalled 19.3 billion pounds as of the official close of the temporary programme.
($1 = 0.8883 pounds)