UK gilts slump on higher risk appetite; next week’s policy decision in focus

The UK gilts slumped Thursday as investors moved away from the safe-haven instruments amid gains in riskier assets including equities and crude oil. Also, rebounding crude oil prices discouraged investors from being risk averse.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 2-1/2 basis points to 0.704 percent, the super-long 40-year bond yield climbed 1 basis point to 1.196 percent and the yield on short-term 2-year bond remained steady at 0.100 percent by 10:00 GMT.

The UK government bonds 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 rebound after the US crude stocks surprisingly plunged by 12.1 million barrels last week, data from the American Petroleum Institute showed after market settlement on Wednesday, compared with expectations for an increase of around 200,000 barrels. The International benchmark Brent futures rose 1.56 percent to $48.73 and West Texas Intermediate (WTI) jumped 1.67 percent to $46.26 by 10:00 GMT.

The Bank of England September monetary policy meeting is scheduled to be held on September 15. We still think the BoE MPC is inclined to move again, though, but not at next week’s meeting where policy will be left unchanged.   

Bank of England Governor Mark Carney while addressing parliament, indicated that post-Brexit recession risks have receded and added that the central bank further room to maneuver monetary policy, if needed.

On Wednesday, the British industrial production increased 0.1 percent m/m in July, the market was expecting a fall of 0.2 percent m/m, from up 0.1 percent in June. On an annual basis, it jumped 2.1 percent y/y, higher than the market consensus of 1.9 percent y/y, as compared to 1.4 percent in the same period year ago.

On the other hand, manufacturing output fell 0.9 percent m/m, dipped higher the market expectations of 0.4 percent m/m fall, from down 0.2 percent in June. On an annual basis, it increased 0.8 percent y/y, lower than the consensus of 1.7 percent y/y increase, from previous 0.6 percent. This will be seized on by BoE MPC members as building the case for additional monetary stimulus in November.

Meanwhile, the FTSE 100 traded 0.55 percent higher at 6,884 by 10:00 GMT.