Pound endures week of misery amid gilt sell-off
The pound came in as the worst-performing G10 currency for a second day running yesterday, as the gilt market continues to trade at decade-long highs.
After spiking as high as $1.255 on Tuesday, the pound has since fallen to $1.229, its lowest point since October 2023.
“What makes the current situation particularly noteworthy is that higher interest rates normally help strengthen the currency, so the fact we’re seeing the pound weaken even as gilt yields rise goes to demonstrate how nervous investors are right now,” explained Deutsche Bank analysts.
The high rate of gilt ownership by overseas investors (around 30 per cent), combined with the UK’s sluggish growth and above-target inflation, have also pushed gilt yields to their highest since the 2008 financial crisis.
Traders have begun to look towards next week, where UK inflation is set to be announced, along with the issuance of 10-year bonds from the Treasury and retail sales data.
Analysts warned that if inflation doesn’t show some serious signs of settling in the data, and demand for the government bond issuance is poor, bond markets could begin a see a second wave of sell-offs.
“Sadly, while things already appear dicey, the situation is likely to get worse before it gets better,” warned Michael Brown, senior research strategist at Pepperstone.
There remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in gilts, and the anaemic nature of UK economic growth
Government bonds around the world have been following a similar trajectory to the UK, ultimately influenced by rising US Treasuries.
For example, the French 10-year government bond yield has hit its highest since October 2023, while Japan’s 10-year yield has hit its highest since 2011.
In the US, markets are waiting eagerly for the country’s non-farm payroll numbers, which could be crucial for influencing the Federal Reserve’s decisions over the path of interest rates throughout 2025.
Markets currently give the Fed a 93 per cent chance to keep rates on hold, according to data from CME Group, thanks to the strong 160,000 extra jobs expected to be added to the economy in today’s data.
“The Fed still thinks rates are slowing the economy and so at the December meeting guided towards two further rate cuts in 2025,” explained Max McKechnie, global market strategist at JP Morgan Asset Management.
“However, if delivered, today’s data raises the question of whether the Fed will need to cut this year at all.”