The yield on benchmark 10-year gilts continues to rise in the UK, reaching 1.2% this morning, the highest they have traded since the June 23 EU referendum, and more than double its low point reached on August 12 (0.52%).
This may be attributable to the rising prospect of an interest rate rise in the US, with markets now pricing in a two in three chance of an increase in December. Yields on 10-year US Treasury bonds have also risen in recent weeks, from 1.6% at the beginning of October to 1.8% now.
The rise comes as international markets are increasingly questioning the UK’s creditworthiness, with the prospect of a ‘hard’ Brexit potentially damaging the UK economy, and tax revenues as a result – and as UK gilt income is paid in pounds and pence, even rising yields are not enough to tempt overseas investors.
Commenting, Laith Khalaf, senior analyst at Hargreaves Lansdown, said anyone holding UK government bonds has seen their capital value fall since the market peaked in August, and by quite some margin for longer dated bonds. However, income-starved investors “can only ignore rising yields for so long”, before they get tempted, he believes. Nevertheless, the growth in yields may offer some glimmer of hope for companies with pension deficits.
“Inflation is the bane of fixed interest securities like gilts, and is coming back into the sharp focus in the UK, as the full ramifications of a weaker pound start to rack up – the high profile spat between Tesco and Unilever last week promises to be the tip of the iceberg for UK consumers when it comes to inflation, and sets an interesting backdrop for this week’s official CPI reading,” he added.
“With bonds yielding so little, they offer precious little protection against anything but very low inflation for a considerable period of time, so it’s natural to see some rebound from extremely thin yield, as inflation worries start to circulate. The prospect of an interest rate rise in the US raises the stakes for bond markets across the globe, and is likely to be partly responsible for spooking the gilt market.”
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