UK gilts gain after BoE warns of economic uncertainties post Brexit vote

The UK gilts gained Thursday after the Bank of England in its Financial Policy Committee report mentioned that economy is facing a challenging period of uncertainty and adjustment after the Brexit vote.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 4-1/2 basis points to 0.763 percent, the super-long 40-year bond yield dipped 4 basis points to 1.398 percent and the yield on 5-year bond slid 1-1/2 basis points to 0.230 percent by 09:50 GMT.

The Bank of England in its Financial Policy Committee report concluded that the financial system has demonstrated resilience to spikes in uncertainty and risk aversion. Core financial markets functioned effectively despite initial sharp price moves and particularly high volumes of transactions relative to normal levels in some markets.  Bank funding conditions remained broadly stable.

Heightened uncertainty about the near-term macroeconomic outlook and the United Kingdom's future relationship with the EU is reinforcing domestic risks. In the UK commercial real estate market, the risks of a sharp adjustment are crystallising.  Prices have fallen and transactions are at their lowest level since 2009.

Although the sharp fall in the sterling exchange rate will help to smooth the adjustment of the current account over time, the risk remains of a fall in overseas investors' appetite to invest in the United Kingdom.  Any disorderly adjustment in capital flows would be associated with tighter funding conditions for the UK real economy

The FPC remains concerned that the ability of some households to service their debts would be challenged by a period of weaker employment and income growth. These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to service debts.

Meanwhile, the FTSE 100 traded 1.12 percent higher at 6,911 by 10:00 GMT.