UK Bond Market in Jeopardy
World Economy

UK Bond Market in Jeopardy

The prospect of a messy divorce between the UK and the European Union threatens to overwhelm support for nation’s bonds from the Bank of England’s asset purchases.
Gilts have been the worst performers in the developed world this month as a sliding currency pushed investors’ expectations for consumer-price growth to a more than two-year high. Still, with the Bank of England having committed in August to buying £60 billion ($73 billion) of bonds over six months, that move pales in comparison to the currency’s 18% drop since Brexit, Bloomberg reported.
Despite the BoE’s support, the danger signs for gilts are mounting. Bets that inflation may stay the central bank’s hand have seen traders remove wagers on interest-rate cuts all the way through 2017.
On top of that, should Prime Minister Theresa May’s government purse a departure from the EU that deprives the country of tariff-free access to the single market, it may create an even more toxic environment for bonds, boosting prices for domestic producers while hurting exporters’ prospects.
With the government eyeing fiscal stimulus to support growth, a dramatic increase in funding costs may ultimately prove a more serious problem than the currency’s weakness.
“UK government bonds are among the most vulnerable assets,” said Alberto Gallo, London-based head of macro strategies at Algebris Investments LLP, which oversees $5.2 billion. “They are at these levels because the BoE is still buying them, but that’s an artificial level. With sterling declining more and more, the BoE will be under pressure from inflation.”
Algebris has a short position on gilts, Gallo said, meaning a bet the assets will decline.
The yield on UK 10-year gilts rose 13 basis points, or 0.13 percentage point, this week, adding to a 22 basis-point increase in the previous five days. It jumped to 1.15% on Friday, the highest since the June 23 referendum. Yields touched a record-low 0.5% in August, and were as high as 1.99% on the last day of 2015.
Gilts lost 2.3% in October through Thursday, the biggest decline among sovereign markets tracked by the Bloomberg World Bond Indexes.

Short URL : https://goo.gl/2BkkDI
  1. https://goo.gl/xHgsny
  • https://goo.gl/Lp11in
  • https://goo.gl/DNzXNJ
  • https://goo.gl/BwUjHq
  • https://goo.gl/0kDrrP

You can also read ...

While China tries to alleviate its demographic crunch, the aging society means a pension shortfall.
Forget that image of sweatshops making all kinds of cheap...
Russia Economic Recovery Underway
Retail sales in Russia picked up in April, while real wages...
In 2017 banks had total mortgage lending of around $352 billion.
High levels of household debt are the greatest risk to Sweden’...
Saudi Gov’t Told Not to Boost Spending
The International Monetary Fund urged the Saudi government not...
Greece at Crucial Point
Discussions are heating up over future debt repayments for...
Brazil CB Keeps Rates on Hold
Brazil’s central bank considered cutting interest rates last...
Peru Economy Strengthens
Economic growth in Peru strengthened in the first quarter...
EU Tells Italy to Cut Debt, Warns of Euro Spillover
Italy’s incoming government should aim to cut its heavy public...

Add new comment

Read our comment policy before posting your viewpoints