UK gilts climb as risk sentiment dips; yields likely to recover on higher inflation figures

The UK gilts climbed on Tuesday as risk appetite among investors dipped with crude oil and equities. Also, traders preferred safe-haven assets after Moody’s in its latest report downgraded the British economic outlook following the decision to leave the European Union.

The yield on the benchmark 10-year gilts fell 2-1/2 basis points to 0.800 percent, the yield on super-long 30-year bond dipped 2 basis points to 1.666 percent and the yield on short-term 2-year bonds slid 1/2 basis points to 0.171 percent by 09:30 GMT.

The June UK inflation stats show an in-line-with-expectations 0.2 percent m/m rise in the CPI that takes the annual rate up to a higher-than-expected 0.5 percent y/y rate from 0.3 percent y/y in May, with the annual core inflation rate also higher than predicted, at 1.4 percent y/y, as compared to 1.3 percent expected, also on the back of a 0.2 percent m/m rise.

The acceleration comes from pickups in both the goods and services sectors, with a significant jump in road fuel costs pushing up transportation costs in particular. This causes Q2 CPI annual inflation to edge higher, to 0.4 percent y/y, in line with the BoE's central case prediction in May, from 0.3 percent y/y in Q1. This reading eases pressure from the central bank to loose monetary policy if output prices rally over the next few months.

Moreover, the Moody’s, a US based bond credit rating company in its recent report concluded that the UK’s credit worthiness remains under downward pressure following the decision to leave the European Union. Also, Moody's forecasts real GDP growth of 1.5 percent and close to 1 percent for 2016 and 2017, respectively. The US rating company also added that the UK budget deficit is likely to remain higher than expected before the EU vote, at 3.6 percent of GDP in 2016 and 3.5 percent of GDP in 2017.

Oil prices eased as concerns over a crude and refined fuel surplus outweighed an expected cut in U.S. shale production. The International benchmark Brent futures fell 0.68 percent to $46.62 and West Texas Intermediate (WTI) tumbled 0.64 percent to $44.95 by 08:10 GMT.

On Monday, in a speech on the implications of 'Brexit' for monetary policy, the Bank of England MPC's Martin Weale said that he is not sure if he will support a rate cut at the August 4 MPC meeting as his decision will be based on whether or not the short-term hit to demand from the 'Brexit' vote would significantly outweigh the long-term inflation pressures, and so far he doesn't get the sense that consumers or businesses are panic-struck.

He further added the BoE should be careful that cutting interest rates does not backfire and lead to unforeseen consequences such as higher mortgage rates and adds that QE might be less potent now that interest rates are so low.

Lastly, investors will remain keen to focus on the wave of economic data this week, including unemployment rate, claimant count change, retail sales, PMI. Meanwhile, the FTSE 100 trading down 0.45 percent at 6,665 by 10:00 GMT.