U.K Gilts slump on expectation of strong consumer inflation

The U.K gilts slumped on Monday as market anticipate stronger consumer price figure on Tuesday and awaits the Bank of England MPC policy rate decision and statement on Thursday. The benchmark 10-year bonds yield, which is inversely proportional to bond price rose 2.78 pct to 1.404 pct and 3-year bonds yield jumped 4.57 pct to 0.548 pct 11:50 GMT.

The consumer price data is expected slightly higher from the previous month (March consumer price is expected to rise 0.3 pct, as compared to previous 0.2 pct in February), but the BoE will probably maintain a wait-and-see approach ahead of the 23rd June EU referendum.

The Bank of England is expected to keep interest rates on hold for the 85th month in a row. This is consistent with the assessment that recent economic data have improved a bit- Q4 2015 GDP grew by 0.6% q/q, which is slightly stronger than Q3’s 0.4% expansion. The unemployment rate during the 3-months to January held steady at 5.1% and the trade deficit narrowed from GBP 5.23 billion to  GBP4.840 billion in February.

Lastly, if inflation and GDP growth fail to improve over the coming months, ECB easing will occur sooner rather than later, pushing bonds prices further up.