Our views

Gilt corner: gilts wax and wane among the geopolitical turmoil


Craig Inches, Head of Rates & Cash

16 April 2018

Last week was a topsy-turvy time for government bond markets. In the absence of any hard economic numbers from the UK, gilts took their direction from a range of wider geopolitical events, waxing and waning as tensions between Russia and the West spilled over into markets.
The Debt Management Office’s (DMO’s) auction last Tuesday was relatively well bid for, and with the Bank of England’s latest round of buying under the Asset Purchase Facility (APF) now winding down, net gilt supply in the market will turn positive once more ending, the recent drought in issuance. 
Gilt yields ended the week slightly higher, underperforming against their European counterparts, where mixed messages from policymakers at the European Central Bank gave bonds there a few wobbles of their own. Meanwhile hawkish notes from the latest round of US Federal Reserve meetings provided gilts a little support against US Treasuries.
And with the details of a renegotiation of the North American Free Trade Agreement (NAFTA) coming into view, Canadian bonds bore the brunt of this week’s underperformance, with some analysts questioning how any changes might affect Canada’s future interest rate path.
Our attention for the coming week will be focused on two key pieces of UK data. While we’re still expecting inflation to fall back towards target, if the recent rally in the oil price sustains its current levels this might feed through into higher prices at the pumps. Most important will be the labour market data. If that holds up, it should rubber stamp expectations for another UK rate hike in May, although even if the data comes in softer than anticipated it is unlikely to deter the Monetary Policy Committee at this late stage.

Last week was a topsy-turvy time for government bond markets. In the absence of any hard economic numbers from the UK, gilts took their direction from a range of wider geopolitical events, waxing and waning as tensions between Russia and the West spilled over into markets.

The Debt Management Office’s (DMO’s) auction last Tuesday was relatively well bid for, and with the Bank of England’s latest round of buying under the Asset Purchase Facility (APF) now winding down, net gilt supply in the market will turn positive once more ending, the recent drought in issuance. 

Gilt yields ended the week slightly higher, underperforming against their European counterparts, where mixed messages from policymakers at the European Central Bank gave bonds there a few wobbles of their own. Meanwhile hawkish notes from the latest round of US Federal Reserve meetings provided gilts a little support against US Treasuries.

Also with the details of a renegotiation of the North American Free Trade Agreement (NAFTA) coming into view, Canadian bonds bore the brunt of this week’s underperformance, with some analysts questioning how any changes might affect Canada’s future interest rate path.

Our attention for the coming week will be focused on two key pieces of UK data. While we’re still expecting inflation to fall back towards target, if the recent rally in the oil price sustains its current levels this might feed through into higher prices at the pumps. Most important will be the labour market data. If that holds up, it should rubber stamp expectations for another UK rate hike in May, although even if the data comes in softer than anticipated it is unlikely to deter the Monetary Policy Committee at this late stage.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.