UK gilts trade mixed on strengthening Fed rate hike expectations; weak equities support Treasury yields

The UK gilts traded mixed Monday following a rise in the United States Treasury yields after hawkish comments made by the Federal Reserve policymakers. On the contrary, bonds prices saw upward pressure at the short-end of the curve as investors poured into safe-haven instruments amid losses in riskier assets including equities and crude oil.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 1 basis point to 0.867 percent, the super-long 40-year bond yield bounced 2-1/2 basis points to 1.408 percent and the yield on short-term 2-year bond dipped nearly 2 basis points to 0.163 percent by 09:50 GMT.

Bloomberg’s implied portability for a rate hike increased to 30 percent for the September FOMC meeting, up from 25 percent calculated at the end of last week.

Moreover, the Boston Federal Reserve President Eric Rosengren (a voter in 2016) said that he sees a reasonable case for gradual rate increases and a failure to continue the path of gradual rate normalisation could shorten the recovery; history shows the difficulty of slowing the economy after waiting too long to tighten policy.

He further added that payrolls growth has been somewhat choppy of late, but the United States economy is performing quite well, has proven resilient to international risks, and is at/close to full employment.

Additionally, Fed Governor Daniel Tarullo, speaking on CNBC, said that he will not comment on the timing of Fed rate increases, but wouldnt foreclose the possibility of a rise this year. Also, would want evidence that inflation will rise and can be sustained at 2 percent and answer to low-rate risks isnt necessary to hike. On balance his remarks seem to be on the side of holding off from tightening policy.

Dallas Fed President Robert Steven Kaplan said that the case for a rate hike has strengthened in the last few months, but the Fed can afford to be patient because neutral rates are low. He further added that low rates create distortions/imbalances and the Fed will debate this over the next few months. The ISM reports a little more negative than expected and does not think the economy is overheating, he added.

In addition, the UK gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of Englands target. Crude oil prices fell more than 1 percent after a number of rigs digging for oil in the US rose again last week. The International benchmark Brent futures fell 1.69 percent to $47.19 and West Texas Intermediate (WTI) dipped 1.68 percent to $45.11 by 09:50 GMT.

Lastly, the Bank of England September monetary policy meeting is scheduled to be held on September 15. We still think the BoE MPC is inclined to move again, though, but not at next week’s meeting where policy will be left unchanged.   

Moreover, Bank of England Governor Mark Carney while addressing parliament, indicated that post-Brexit recession risks have receded and added that the central bank further room to maneuver monetary policy, if needed.

Meanwhile, the FTSE 100 traded 1.56 percent lower at 6,672 by 09:50 GMT.