Gilt yields stable ahead of crucial UK inflation data
UK government debt put in a better performance on Tuesday, after fresh figures from across the Atlantic hinted at softer inflationary pressures in the world’s largest economy.
The yield on the 10-year gilt crept lower on Tuesday afternoon, leaving it on track to break six days of consecutive rises, although it was still close to its post-financial crisis high.
The yield on the 30-year gilt remained flat, hovering around the 23-year high reached on Monday.
Gilts were supported by new data from the US, which suggested that inflationary pressures might prove to be less durable than feared.
Producer prices increased 0.2 per cent in December, down from 0.4 per cent the month before and below economists’ expectations.
The measure, which gauges the price of manufactured goods leaving the factory, is often seen as a leading indicator for consumer prices.
While the figures came in below expectations, some commentators noted that prices in certain sectors – such as airfares – continued rising fast.
“December’s PPI data look good superficially, but they have a nasty sting in their tail,” Samuel Tombs, chief US economist at Pantheon Macroeconomics said.
Many economists are concerned that inflation will remain stubbornly above the Fed’s two per cent target, supported by a strong economy and Donald Trump’s economic plans.
With fears about inflation persistence on the rise, traders have pared bets on US interest rate cuts, anticipating just one rate reduction this year.
This has driven the yield on US Treasuries higher, which has dragged government bond yields higher around the world. Yields reflect the cost of government borrowing.
UK government debt has faced the most severe pressure, as investors are also pricing in fears about the inflationary risks of the government’s maiden Budget.
Many analysts are worried that the combination of higher taxes, more borrowing and extra spending will push up inflation.
December’s inflation report will be published on Wednesday morning, which will shed further light on price pressures in the UK economy.
City economists expect the headline rate of inflation to remain stuck at 2.6 per cent, kept above target due to higher energy bills.
Services inflation, meanwhile, is expected to fall below five per cent. This is significant because Bank officials view services inflation as a good gauge of homegrown inflationary dynamics.
Commentators suggested that there could be significant market volatility if the figures did not align with expectations.
Francesco Pesole, an FX analyst at ING, said selling pressure on gilts could “intensify” if the figures come in ahead of expectations.
Similarly, Kathleen Brooks, research director at XTB, warned that bond yields could “surge once more” if there was a “shock increase in inflation”.