Gilts Climb on Broad Haven Demand, Yields Reach Two-Month Low

  • U.K. bonds advance along with Treasuries on North Korea news
  • Pound weakens versus rallying euro, Brexit talks in focus

Markets React to North Korea's Latest Missile Launch

U.K. government bonds rose along with Treasuries and German bunds as investors sought the safest fixed-income assets after reports that North Korea fired a missile over Japan.

The yields on two- and 10-year gilts dropped to their lowest levels in more than two months as U.K. financial markets reopened on Tuesday after a Bank Holiday weekend. Gilt yields have declined since early July on fading prospects of the Bank of England lifting interest rates any time soon amid signs of a slowing economy.

Growing tensions between the U.K. and the European Union as they kick off the latest round of Brexit negotiations have supported gilts and weighed on sterling, which reached its weakest level in 10 months versus the euro on Tuesday.

The U.K. was “shut yesterday and bond markets moved up, so this is a little bit of a catch-up in gilts,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “For the main part, it’s to do with North Korea. Treasury yields were down around seven basis points, so in that context the move in gilts is consistent.”

The yield on benchmark 10-year gilts slid as much as six basis points to 0.99 percent, its lowest since June 22. Two-year gilt yields touched 0.14 percent, the lowest since June 21. German bunds also rose, with the 10-year yield falling five basis points to 0.33 percent while comparable U.S. Treasury note yields dropped as much as seven basis points to 2.08 percent, the lowest since Nov. 10.

Tense Talks

Gains in the pound have been limited as negotiations between the U.K. and EU are set to be intense. EU officials asked the U.K. to come clean on the money it owes, while Britain said the EU needs to show more flexibility. European Commission President Jean-Claude Juncker lashed out at the U.K.’s Brexit position documents, saying Tuesday that none of them were “satisfactory.”

The pound depreciated 0.4 percent to 93.01 pence per euro, after touching 93.07 pence, its weakest since Oct. 7. Sterling rose 0.3 percent to $1.2971.

With U.K. economic data signaling a slowdown, markets have pared back expectations of tighter BOE monetary policy this year. The implied probability of a 25-basis-point rate increase by year-end was 21%, according to MPC-dated SONIA, sliding from 50% before the BOE’s policy announcement on Aug. 3.

“None of the data we’ve had is telling us there’s a desperate urgency to raise rates,” SocGen’s Simpson said. “Overall it doesn’t sound like we are very close to a majority voting for a hike, certainly any time this year.”

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