UK gilts plunge as pound’s weakness raises inflation expectations, crude oil prices rally

The UK gilts plunged Friday as country’s inflation expectations continued to increase in response to the pound's weakness. Also, investors moved away from the safe-haven buying amid gains in riskier assets including equities and crude oil.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 8 basis points to 0.955 percent, the super-long 40-year bond yield jumped 9 basis points to 1.574 percent and the yield on short-term 2-year bond climbed 5 basis points to 0.179 percent by 07:40 GMT.

UK Gilts underperformed as pound's ongoing slide raised inflation expectations, with the 10-year yield surging beyond resistance/price support at 0.80 percent and hitting 0.90 percent at one point. The latter level, or its intraday high from September of 0.95 percent, should cap it for now, although we believe the general trend will be for rising bond yields during this quarter.

Moreover, the gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Crude oil prices rallied above $50 a barrel for the first time in 2016 after a report that U.S. fuel inventories may have fallen for a fifth straight week. The International benchmark Brent futures rose 0.57 percent to $52.81 and West Texas Intermediate (WTI) also jumped 0.46 percent to $50.67 at 07:50 GMT.

Lastly, investors remained keen to focus on the series of upcoming economic data, highlighted by industrial production, trade balance and 10-year Treasury action.

Meanwhile, the FTSE 100 traded 0.44 percent higher at 7,030 by 07:50 GMT.