Sterling and gilts: what the pundits say
The rallying pound
The pound rallied 1% to $1.23 on Tuesday, its best day since fears of a “hard Brexit” gripped the currency market a fortnight ago. The probable cause, said the FT, was the assurance of a UK Government lawyer, James Eadie, that Parliament was “very likely” to have the final say on whether to accept Britain’s exit deal with the EU. Eadie was responding to a High Court challenge brought by Government critics – led by fund manager Gina Miller, of SCM Private – who argue that Parliament must have a vote on the decision to invoke Article 50. Eadie’s remarks soothed forex traders, who have sent sterling down 6% since the Tory party conference earlier this month, on fears that Britain might quit the EU “without special access to the single market”.
Gilt complex
Hard-line Brexit talk has also triggered “a potentially ominous shift in the reflexes of the gilts market”, said Ambrose EvansPritchard in The Daily Telegraph. Until recently, the weaker pound had coincided with falling gilt yields (which move inversely to prices) – yields on 10-year gilts reached the exceptionally low level of 0.5% in August. The low cost of Government borrowing was seen as an international vote of confidence in Britain’s economic prospects; but a sharp rise this month has prompted fears that “the bond vigilantes are sharpening their knives”. According to RBC UK rates strategist Vatsala Datta, “for the first time, foreign investors are beginning to question the credit-worthiness of the United Kingdom”. In that context, this week’s sudden increase in yields to 1.1%, the highest rate since June, was surely significant.
Relax, for now
“Don’t panic,” said Nils Pratley in The Guardian. UK 10-year gilt yields might have doubled from their low point in August, but, as Oxford Economics points out, “they haven’t strayed very far from the curve taken by most G7 countries’ bond markets since the summer”. Conditions may not remain benign forever – “a further downwards lurch in the pound, an inflation shock, or a Brexitrelated collapse in business confidence could all upset investors’ appetite for gilts”. But on any “sensible definition” of what would represent a crisis, “a yield of 1.1% is not even close”.