UK: Gilt, GBP link might not be what it seems - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that they are somewhat wary of the cited link between rising Gilt yields and the depreciation of the pound.

Key Quotes

“Double-selling on fears of currency depreciation fuelling inflation is given as a reason for rising 10-year Gilt yields. Firstly, the move in Gilts needs to be viewed in the global context – long-term yields have been rising everywhere in line with the market narrative that central banks’ appetite for QE is fading and a shift to fiscal stimulus is imminent. We don’t agree with that and upward pressure on yields will be met with the BoJ accelerating JGB buying to cap yields and the ECB extending QE in December.

Secondly, crude oil price rises are pressuring yields globally while finally, previous episodes of pound devaluation indicate currency-related inflation has proved temporary. So we are not convinced that Gilt selling is as Brexit related as pound selling is and it might be premature to conclude that foreign investors are taking flight resulting in current account deficit financing strains. Yield levels could very quickly become ‘King’ again, drawing in more flows from abroad. Don’t forget Q2 BoP data showed the UK current deficit was financed with considerable ease (chart above).

Comments from BOE MPC member Michael Saunders garnered some attention yesterday with his view that given the UK’s current account deficit that he would not be surprised if the pound fell further, but added he was “fairly agnostic” over whether further selling is likely. This shouldn’t surprise anyone and an expression of concern by a key policymaker would do more harm than good in an attempt to stabilise the pound.”