The Information Exchange

Pound weakness drives higher yields in Gilts; what’s next for UK rates?

In the months following the Brexit vote, the British Pound declined 15% in trade-weighted terms and 17% versus the US dollar. With monetary policy easing and political uncertainty, volatility is now suggesting a new set of risks to consider – including, what does this mean for the Bank of England (BoE) inflation outlook? On 3 November, the BoE Quarterly Inflation Report will shape how inflation expectations are viewed over the medium term. One of the key inputs will be how commodity prices influence forward inflation expectations. The graphs below illustrate the recent rebound in key benchmark commodities and the correlated increase in Gilt yields.

“Short Sterling implied rates have moved sharply higher over the past month, while 10-year Gilt yields have moved from 0.51% to just above 1% over the past 8 weeks – which may be a signal the markets are reshaping expectations for further monetary easing,” says Chris Rhodes, Head of Interest Rates at ICE Futures Europe. “Increased international focus from investors combined with strong liquidity in the ICE Short Sterling and Gilt complexes have resulted in robust volumes. Record highs in Gilt futures open interest bode well for activity in this market in particular.”

Hedging UK Rates

With many dynamics playing out in the GBP markets, market participants with interest rate exposure in the UK, and globally, rely on the deep liquidity of ICE Long Gilt Futures and Short Sterling Futures and Options to hedge risk and reposition for evolving market conditions.