British Government Bonds Rally for Third Day

By Andy Bruce

(Reuters) – British government bonds rallied for a third consecutive day on Friday, effectively erasing a recent spike in yields reminiscent of former Prime Minister Liz Truss’ “mini-budget” crisis in 2022.

Yields across a range of gilt maturities fell by approximately 6 basis points as of 1200 GMT, driven lower by unexpected figures showing a decline in British retail sales for December, contributing to an ongoing trend of disappointing economic data.

The 10-year gilt yield was at 4.622%, heading for its largest weekly decline since July, down 30 basis points from a peak of 4.925% on January 9, the highest since 2008.

The prior week’s surge in yields was mainly influenced by shifting U.S. markets, placing pressure on Finance Minister Rachel Reeves, as it increased the risk of her not meeting fiscal rules without further tax increases or spending reductions.

On Wednesday, Britain’s opposition Conservative Party claimed that Reeves lacked market confidence, referencing the bond movements.

However, the gilt market has rebounded over the last three days, partly due to disappointing economic data – specifically, the unexpected drop in retail sales in December – and the rising probability of a Bank of England interest rate cut on February 6.

Since the end of 2024, the 10-year gilt yield has increased by only 5 basis points, outperforming equivalent benchmark bonds from all other Group of Seven advanced economies except for the United States.

Nonetheless, 10-year yields remain approximately 0.35 percentage points higher than when Reeves presented her first budget on October 30, which proposed higher taxes and increased borrowing for investment.

Thirty-year gilt yields, which experienced significant selloff pressure and peaked at their highest since 1998 on Monday at 5.472%, are currently just 6 basis points above the end of 2024 at 5.17%.

Investors on Friday factored in 68 basis points worth of interest rate cuts from the Bank of England by year-end, indicating two to three reductions of 0.25 percentage points each, compared to fewer than 50 basis points earlier in the week.

“We still think this is on the low side – we continue to forecast 100 basis points of cuts,” stated Andrew Goodwin, chief UK economist at Oxford Economics. “If we’re proven right on Bank Rate, there’s still potential for yields at the longer end to decline.”,