The UK 10-year Gilt yields touched its highest for the first time Friday since the Brexit vote on June 23 as a stronger third-quarter gross domestic product (GDP) faded further easing bets from the Bank of England for this year.
Also, the Gilt/Bund yield spread also widened to the 110 basis points mark. We would expect the yields to stay in the range of 1.20-1.30 percent in the short-term, with an upward break likely eventually but not imminently.
The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 7 basis points to 1.30 percent (highest since Brexit vote), the super-long 40-year bond yield jumped 2 basis points to 1.72 percent and the yield on short-term 2-year bond hovered around 0.30 percent.
The preliminary output-based UK Q3 GDP growth rate of 0.5 percent q/q is even stronger than our above-consensus prediction of 0.4 percent (the market sought 0.3 percent) and takes the annual rate up to 2.3 percent y/y from 2.1 percent in the second quarter and vs 2.1 percent expected by the market consensus.
Moreover, the Bank of England Governor Mark Carney said that pounds move has been substantive and there has been a fairly substantive move in the British exchange rate, which the MPC has to take into account in its policy deliberations. He said that the MPC, however, needs to consider how persistent the move in pounds is likely to be.
This gives us a pretty strong signal that the BoE MPC might, after all, choose to stand pat at the Nov meeting; the more so as Carney says that monetary policy has been overburdened. This suggests that he’d prefer fiscal policy to now take over the baton in pursuant of the authorities’ dash-for-growth objectives. This should calm pounds nerves somewhat for the time being, following the sharp Cable sell-off seen during the latter part of Tuesday’s session.
The UK bonds have been closely following developments in oil markets because of their impact on inflation expectations. Crude oil prices recovered from previous losses on fresh buying and concerns over Venezuela's stability. The International benchmark Brent futures rose 0.84 percent to $50.40 and West Texas Intermediate (WTI) jumped 0.51 percent to $49.43 by 08:30 GMT.
The acceleration of UK CPI inflation to 1.0 percent y/y from 0.6 percent in August occurs on the back of a 0.2 percent m/m increase and stands at its highest reading since November 2014. The m/m increase, driven higher by road fuel costs, clothing & footwear costs, hotel accommodation costs and gas prices, is actually consistent with the average m/m rise for a September month over the past 10 years.
Meanwhile, the FTSE 100 traded 0.18 percent lower at 6,973.70 by 09:40 GMT.
