(Bloomberg) -- A hectic week for UK bond and currency traders is coming to an end with yields stuck near the highest levels in years and the pound close to its weakest since late 2023.
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The market opened slightly weaker on Friday, in line with peers, extending the calmer tone that prevailed on Thursday afternoon. The pound was little changed at $1.2303 and the 10-year gilt yield rose three basis points to 4.84%.
Concerns over the state of the UK’s stretched public finances combined with persistent inflation fueled a brutal selloff this week, and drew comparisons with a market meltdown two years ago that toppled Liz Truss’ administration.
UK 10- and 30-year bond yields jumped more than 20 basis points over the past five sessions, the most in a year. While many investors say the rout was overdone, caution prevails — despite the more attractive rates on offer.
“More clarity around fiscal policy at the upcoming budget, and about the evolution of the bank rate might be needed for gilt demand to return in a sustainable way,” Morgan Stanley strategist Fabio Bassanin wrote in a note. “Given these prevailing dynamics we recommend investors maintain a cautious stance on UK rates.”
Fidelity, Pimco Stick With UK Gilt Bets After Market Turmoil
UK officials have tried to reassure markets. Darren Jones, the Treasury’s chief secretary, said the gilt market is functioning in an “orderly way,” comments that were later echoed by the Bank of England’s Deputy Governor Sarah Breeden, who said she’s willing to continue with further interest rate cuts.
The remarks bode well for big investors including Pacific Investment Management Co., Franklin Templeton and Fidelity International who are sticking to their bullish bets on UK government bonds. Some are even looking to buy more.
But for the Labour government the backdrop remains challenging. Higher borrowing costs threaten to wipe out the dwindling £9.9 billion ($12.2 billion) of fiscal headroom. Chancellor of the Exchequer Rachel Reeves may be forced to tighten fiscal policy, likely favoring fresh cuts to public spending over tax hikes.
UK Bond Selloff Puts Reeves’ Economic Project on the Brink (1)
Also the outlook for the pound remains dire. Banks including Wells Fargo and Deutsche Bank AG said there’s room for sterling to drop further as investors unwind long positions and the BOE cuts interest rates. Options markets also suggest traders are bearish.