UK gilts rise on short covering, BoE maintains slightly hawkish tone

The UK gilts gained Friday as investors covered previous short positions, booked after the Federal Reserve raised interest rates for the first time this year and signalled at a faster hike in borrowing costs next year.

The yield on the benchmark 10-year gilts, which moves inversely to its price, fell 4 basis points to 1.44 percent, the super-long 40-year bond yield dipped 4 basis points to 1.91 percent and the yield on short-term 2-year slid 1 basis point to 0.14 percent by 11:00 GMT.

The tone of the Dec UK BoE MPC meeting minutes maintains a slightly hawkish hue, with the members repeating that there are limits to the degree to which above-target inflation will be tolerated. They see inflation rising to 2 percent within the next six months and add that monetary policy can react in either direction to variations in the economic outlook. As such they stress they'll continue monitoring closely the developments in inflation expectations. Governor Mark Carney also adds that the BoE will take whatever action is imperative to ensure that inflation expectations remain well anchored.

Moreover, the Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.

Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates.

On Tuesday, UK’s annual consumer inflation accelerated to 1.2 percent y/y in November, from previous 0.9 percent y/y, registering its fastest pace of growth since October 2014 and on the back of a 0.2 percent m/m increase.

The core rate is running at an even quicker pace, up at 1.4 percent y/y from 1.2 percent in November. As the headline rate marks a faster rate of increase than the 1.1 percent y/y expected by the market, this should be construed as a Gilt-negative development.

The Bank of England (BoE) in its latest inflation survey raised 1-year inflation expectations to 2.8 percent, from estimate of 2.2 percent in August, 2-year forecast to 2.5 percent, from an earlier forecast of 2.2 percent, 5-year forecast to 3.1 percent vs prior 3.0 percent. Additionally, the central bank increased 12-months rate rise expectations to 41 percent, from previous expectations of 21 percent.

Meanwhile, the FTSE 100 traded 0.18 percent higher to 7,011 by 11:00 GMT. While at 11:00 GMT, the FxWirePro's Hourly GBP Strength Index stood neutral at +45.42 (higher than +75 represents purely bullish trend).