Gilt Yields Hit Highest in Nearly Three Months Ahead of CPI

(Bloomberg) -- Gilt yields rose to their highest in almost three months ahead of UK inflation data that could cement the case against the Bank of England cutting interest rates again this year.

The two-year yield rose as much as 2 basis points to 3.98%, its highest level since June 9. Wednesday’s inflation print is forecast to show the headline rate accelerated to 3.7% in July, nearly double the BOE’s target.

Traders have curbed their bets on easing since an unexpectedly hawkish central bank meeting earlier in the month, while stronger-than-expected data for growth and jobs have added to the case for caution. Longer-dated bonds are under pressure globally as investors seek higher yields to compensate for a surge in government borrowing.

“Some of those inflation expectations are coming back into the market once again,” said Rufaro Chiriseri, head of fixed income at RBC Wealth Management, in an interview with Bloomberg TV. Traders are asking “‘Is that inflation print going to be hotter than what the BOE had initially anticipated?’” she said.

The BOE’s decision to cut rates this month was more finely balanced than markets were expecting, and in its aftermath RBC Wealth has shifted to a neutral position on gilts, having previously been “modestly” overweight, Chiriseri said. She is sticking to her underweight position on duration due to concerns about ongoing fiscal issues, the term premium and the risk of upside inflation surprises.

On Tuesday, the 10-year gilt yield briefly hit its highest level since May before paring the move. The yield curve steepened, with the spread between five-and 30-year yields reaching its widest since early 2017.

At its latest policy meeting, the BOE issued a new forecast warning that inflation will hit 4% in September. Policymakers are juggling an unsettling resurgence in inflation, driven by a spike in food bills, against mounting job losses and an economy which is expected to slow.

Job Weakness Should Worry BOE More Than CPI: Marcus Ashworth

Chiriseri predicted that a weaker labor market would eventually ease price pressures, enabling the BOE to cut rates again in the coming months.

“The inflation picture is going to be driven by what’s happening in the wage market,” she said.

Story Link: Gilt Yields Hit Highest in Nearly Three Months Ahead of UK CPI

--With assistance from Alice Atkins.

(Updates to add Chiriseri’s gilt position in fifth paragraph)

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