UK gilts witness heavy sell-off on hawkish comments from Fed Chair Yellen; Q3 GDP in focus

The UK gilts witnessed a heavy sell-off across the curve Tuesday on hawkish comments from the Federal Reserve Chair Janet Yellen at the University of Baltimore.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 4-1/2 basis points to 1.44 percent, the super-long 40-year bond yield climbed 4 basis points to 1.91 percent and the yield on short-term 2-year bounced 4 basis points to 0.13 percent by 09:20 GMT.

The British gilts have been closely following developments in the U.S. debt market. The benchmark 10-year bonds witnessed a heavy sell-off, pushing yields by 4-1/2 basis points to 2.58 percent. We foresee that the bund prices will keep drifting between small gains and losses in quiet trading due to a long global Christmas holidays.

Overnight, the Federal Reserve Chair Janet Yellen commented that the United States is now seeing its strongest labour market in nearly a decade as job creation has continued at a relatively steady pace. Also added that she has seen signs of wage growth improving and that weekly earnings for younger workers are making strong gains.

Moreover, the Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range last Wednesday, 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.

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.

Lastly, markets will remain keen to focus on the upcoming economic data and events, highlighted by GfK consumer confidence, business investments, current account and Q3 GDP data.

Meanwhile, the FTSE 100 traded 0.16 percent lower to 7,006 by 09:20 GMT. While at 09:00 GMT, the FxWirePro's Hourly GBP Strength Index stood neutral at -13.48 (lower than -75 represents purely a bearish trend).