Gilts Slide, Pound Jumps as Inflation Surges to Four-Year High

Updated on
  • Slide in bonds spurred by talk of a softer Brexit: SocGen
  • Traders making a mistake by pricing BOE rate hike: Commerzbank

Benchmark gilts headed for the biggest drop in almost four months and the pound held its gains after U.K.’s inflation accelerated to the fastest in four years.

The nation’s 10-year bonds snapped a two-day rally as annual inflation surged to 2.9 percent in May from 2.7 percent a month earlier. The median forecast of economists in a Bloomberg survey was for consumer prices to have increased 2.7 percent. Prime Minister Theresa May managed to survive a rebellion from her Conservative lawmakers on Tuesday by pledging to consult the party more over policy and vowing to seek a national consensus on Brexit, reducing the allure of gilts.

“Gilts started falling materially after the CPI numbers, there was a big dip in gilts as CPI was well above consensus,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. The softer Brexit narrative “will be negative for gilts and so we might have got some selling on the back of that once CPI started triggering the slide.”

The yield on 10-year gilts climbed six basis points to 1.03 percent as of 2:43 p.m. in London after touching 1.05 percent earlier in the day. The bonds are headed for the biggest losses since Feb. 27. The pound rose 0.6 percent to 1.2719, having touched $1.2738 earlier in the day.

  • “I do think markets are a little bit thinner generally given the uncertainty in the political backdrop and that could have exaggerated the move,” SocGen’s Simpson said.
  • Resistance for sterling at 1.2769, the low on May 31; support at 1.2636, low on June 9
  • “The market is making a mistake in pricing in a higher rate-hike probability,” says Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt. “With higher political risks, and EU negotiations further postponed, I think the probability of a negative scenario for the British economy has increased, which will force the BOE to keep a more expansionary monetary policy for some time.”
  • German Finance Minister Wolfgang Schaeuble says U.K. would be welcomed back to the EU if the British decided they no longer wanted to quit the bloc

— With assistance by Sejul Gokal, and Vassilis Karamanis

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