UK Gilt Yields are Rising

UK gilt yields have risen to multi-year highs, raising the cost of borrowing for companies and the British government. Is this a bad omen for the FTSE and what about GBP?

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Yields rising with inflation

Gilt rates in the last couple of weeks have reached the highest they've been since the end of 2018. Which could make a few traders nervous, since not long after, the FTSE 100 went into correction mode. It wasn't a uniquely UK phenomenon; global markets took a dive as central banks were pushing rates higher. The same could be happening again.

Higher interest rates would be expected to correlate with a stronger currency, all things being equal. But the Fed has begun raising rates and the BOE has signalled a potential pause after three hikes in a row for the UK, explaining the downwards pressure on GBP/USD.

Where things are going

The BOE expects inflation to peak in April, but traders expect it to keep hiking rates well after that to control prices. Gilt prices (opposite to yields) bounced but then quickly rolled over when the BOE last lifted rates but Governor Bailey expressed some worry about growth.

The BOE raised rates three times in a row; the Fed has only done so once. It would be logical to expect the BOE to taper the rate hike pace after the aggressive move over the last three months. Meaning that the rise in gilts could slow down going forward.

On Monday BOE chief Bailey committed to tackling inflation but did warn of the potential impact on the economy and the current economic uncertainty. It might be the first indication that the BOE might pause at the next meeting, before taking rates back to where they were in 2009.

UK LONG GILT CHART

The price of UK Long Gilts is testing the 2018 low near 120 for a second time. There is scope for a double bottom at the major support level - and for the trend to shift back higher or at least into a sideways range with 127-128 a possible ceiling.

Should the 120 level give way, it could open the door to much higher yields, and a whole new environment in which bonds look increasingly attractive vs equities, and possibly pulling more forex traders into the pound relative to countries with weaker yields.

Source: Spreadex trading platform

Key takeaways

BOE is expected to keep hiking rates well after when it expects inflation to peak in April. However, the Fed looks let to hike more aggressively, potentially attracting traders to Treasuries over Gilts.

Investors should stay tuned to BOE's plan for tapering as they might pause at the next meeting.