The selloff in U.K. government bonds gathered pace as the prospect of faster inflation gave investors another reason to pull back from a market hurt by the mounting economic and political cost of Brexit.
Ten-year gilt yields climbed to the highest since the June 23 referendum as traders awaited a report which, according to a Bloomberg survey, will show annual inflation quickened last month to the fastest pace in almost two years. Yields have been climbing for the past three weeks amid speculation the pound’s 18 percent post-Brexit slide is already pushing up prices in stores.
Higher consumer prices would likely curtail spending and growth, adding to the economic pain caused by the lack of political clarity over what quitting the European Union actually looks like. On top of that, faster inflation erodes the fixed payments on bonds, while making it less likely the Bank of England will be able to cut interest rates and extend the asset purchases that supported gilts for much of the year.
“We’re marching resolutely higher on yields,” said Marc Ostwald, a strategist at ADM Investor Services International Ltd. in London. “With the pound doing what it’s been doing,” investors are starting to revise up their inflation expectations, he said. “It’s going to be a choppy ride.”
The annual inflation rate rose to 0.9 percent in September, the highest since November 2014, economists surveyed by Bloomberg predicted before official data due tomorrow. A market gauge of price-growth expectations known as the 10-year break-even rate touched a 2 1/2-year high of 3.07 percent last week, and was at 2.92 percent today.
The yield on the benchmark 10-year security jumped five basis points, or 0.05 percentage point, to 1.15 percent as of 1:01 p.m. London time, after touching 1.22 percent. The 1.5 percent gilt due July 2026 fell 0.50, or 5 pounds per 1,000-pound ($1,217) face amount, to 103.225.
On Wednesday, Britain will sell 2.5 billion pounds of bonds due in 2026, which may also put pressure on debt prices.
The pound fell 0.3 percent to $1.2151, extending its slide this month to more than 6 percent — the biggest decline among major currencies.
Until late last month, sterling was the asset through which investors showed their dismay at the U.K.’s decision to leave the EU, but now the pressures of Brexit are starting to infect bonds. The sudden increase in funding costs comes just as the government might consider fiscal easing to limit the fallout of quitting the bloc, and may prove to be a bigger challenge than the destabilizing effects of a tumbling currency.
“We’ve got so much uncertainty,” Kit Juckes, a London-based strategist at Societe Generale SA, said in an interview with Jonathan Ferro on Bloomberg Radio. “We’ve moved the volatility, or the pain or whatever you want to call it, from the foreign-exchange market to the bond market. I think there’s more to come, I’m afraid.”