Global optimism, UK spending promises lift long gilt yields to three-month high

© Reuters.  Global optimism, UK spending promises lift long gilt yields to three-month high © Reuters. Global optimism, UK spending promises lift long gilt yields to three-month high

By David Milliken

LONDON (Reuters) – British long-dated government bond yields rose to their highest in more than three months on Thursday as a global improvement in risk appetite and the prospect of big increases in public spending overshadowed a more dovish Bank of England.

Ten-year gilt yields () peaked at 0.814%, up around 9 basis points on the day and the highest since July 16, and 20- and 30-year yields gained a similar amount () ().

By contrast, two-year yields () barely budged — pinned down by an unexpected split vote at the Bank of England — and the two-year/10-year yield curve rose to its steepest since July 15 at 24 basis points.

The steepening yield curve reflected countervailing forces at play for different maturities of gilts.

Markets received a shock earlier in the day when two BoE policymakers unexpectedly voted to cut rates, and the majority said a rate cut could become necessary if Brexit uncertainty and a global slowdown did not ease.

One measure of interest rate expectations now prices in a two thirds chance of a quarter-point BoE rate cut by the end of next year, compared with just over half on Wednesday, pushing down on two-year and five-year gilt yields, which are already well below the BoE’s 0.75% Bank Rate.

But the broader tone in markets on Thursday was negative for fixed income assets, bolstered by increased optimism about a trade deal between the United States and China.

German 10-year Bunds , like their British counterparts, rose to their highest since mid-July.

And for longer-dated gilts, there was added upward pressure on yields from the second day of Britain’s election campaign, in which both the Conservative Party and the Labour opposition promised big increases in spending if they win the Dec. 12 vote.

The fiscal news was “arguably more significant” for gilts than the BoE decision, Capital Economics analyst Oliver Allan wrote in a note to clients.

Labour’s would-be finance minister, John McDonnell, promised an extra 150 billion pounds ($ 192 billion) of infrastructure spending during the next five years, on top of 250 billion pounds he has already promised for the coming decade.

McDonnell’s Conservative counterpart, Sajid Javid, said he would spend an extra 100 billion pounds.

Both plans would require a significant increase in gilt issuance over the medium term, and could push up inflation or BoE rates if the spending hits the economy at a time when it is close to full capacity.

However, Capital said it expected the increase in British yields to be limited as any significant rise would attract foreign investors at a time when yields on much euro zone debt are below zero.

“Although UK yields are low historically, they are not particularly low relative to those elsewhere in the developed world,” Allen said.

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Euro reaches three-month high as dollar sags on Fed easing prospects

© Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration © Reuters. FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, pound and Chinese 100 yuan banknotes are seen in this picture illustration

By Shinichi Saoshiro

TOKYO (Reuters) – The euro advanced to a three-month high against the dollar on Monday, as bearish bets on the U.S. currency remained solid after the Federal Reserve signaled last week it could soon cut interest rates.

The euro stretched its rally last week, when it added 1.4%, and rose about 0.15% to $ 1.1386 in early Asian trade, its highest since March 22. It last traded at $ 1.1381.

The versus a basket of six major currencies was a shade lower at 96.107, having struck 96.093 on Friday, its lowest since March 21, after the Fed last week opened the door for a potential rate cut as early as next month.

That weighed on the dollar and in turn reinvigorated its counterparts such as the euro, which has had troubles of its own including Italy’s debt problem and the possibility of the European Central Bank having to ease policy.

“It is true that the ECB may have to ease policy especially with the Fed having shifted to an easing bias,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

“But the ECB already employs a negative interest rate policy and does not have much further room to ease even if they wanted to, unlike the Fed. It is factors like these which have seemingly supported the euro.”

The dollar nudged up 0.1% to 107.395 yen after retreating to a near six-month low of 107.045 on Friday.

The U.S. currency was pressured further against the yen, which often serves as a safe haven in times of political angst, as tensions grew between Iran and the United States.

But it is difficult to see the greenback fall beyond 105 yen as a sustained flight from dollar-assets was unlikely, said Koji Fukaya, director at FPG Securities in Tokyo.

“For example the reached a record high thanks to prospective rate cuts. Stronger investor risk appetite slows any flight-to-quality into the yen,” Fukaya said.

In focus was whether Washington and Beijing can resolve their trade dispute at a summit in Japan this week of leaders from the Group of 20 leading world economies.

Both China and the United States should make compromises in trade talks, Chinese Vice Commerce Minister Wang Shouwen said on Monday.

The Australian dollar rose to a 12-day high of $ 0.6961 after Reserve Bank of Australia (RBA) Governor Philip Lowe said it would be legitimate to question the effectiveness of global monetary policy easing to boost economic growth.

The comments were perceived to be slightly less dovish as just last week Lowe said a recent cut in Australia interest rates to an all-time low of 1.25% would not be enough to revive economic growth.

The was already on a steady footing after rebounding from a five-month low of $ 0.6832 last week when the Fed’s tilt towards monetary easing helped offset bearishness from the probability of policy easing in countries including Australia and New Zealand.

The New Zealand dollar traded near a 10-day peak of $ 0.6605 scaled on Friday although the Reserve Bank of New Zealand (RBNZ) is expected to echo the dovish sentiments of other central banks when it holds a policy meeting on Wednesday.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

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