UK gilts gain as investors expect Q3 GDP to suffer on Brexit angst; 10-year yields at 1-week low

The UK gilts gained Monday as investors speculate that the county’s upcoming third quarter gross domestic product (GDP) is likely to deteriorate in the wake of Britain’s most likely exit from the European Union.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 4-1/2 basis points to 1.043 percent (more than a week low), the super-long 40-year bond yield also dipped 4-1/2 basis points to 1.530 percent and the yield on short-term 2-year bond slid 3-1/2 basis points to 0.214 percent by 10:20 GMT.

This week, investors will remain keen to focus on the third-quarter GDP readings is scheduled to be released on Thursday, October 27. We foresee that the Q3 GDP to increase 0.3 percent q/q, from previous 0.7 percent. On an annual basis, it is likely to remain unchanged at 2.1 percent y/y.

According to a Bloomberg survey, more than 70 percent of economists are expecting the BoE to cut rates to 0.10 percent in November. This does not include us, as recent UK data have not provided justification for further easing, although recent MPC comments have remained dovish.

Last week, 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 rise 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 Sep month over the past 10 years.

The BoE MPC members however, already know that inflation will move above its 2 percent target before the end of the 2-year horizon but have categorically stated that they would overlook the prospective overshoot when setting policy in order not to hurt future growth and jobs. So, any appreciation in GBP from these latest figures will probably be fleeting.

Meanwhile, the FTSE 100 traded 0.05 percent higher at 7,023.70 by 10:20 GMT.