UK 10-Year Gilt Yields Fall Over the Concern on US Fiscal Cliff

The UK gilts have surged, however, the 10-year yields have experienced the biggest fall in the last 4 weeks as the speculations are rife that the US policymakers will not be able to come up with an agreement to avoid the upcoming fiscal cliff. Hence, the demand for comparatively safer assets has risen. The Majority Leader of US Senate, Harry Reid has stated that the country is probably heading towards a fiscal cliff. Reid blamed the Republicans for this situation and added that as there are only a few days remaining, he believe chances of an agreement are very slim. The $600 billion worth spending cuts and tax increases will be effective from next year, unless the Congress acts on the same. In addition to the effect of economic situation of US, another reason behind yield’s decline is the speculation that some British investors are trying to reduce risk during the year-end period.

The Money Manager of Ignis Asset Management, Stuart Thomson stated that the UK market is currently very thin; yet, there is still an element of buying which is in direct relation with the year-end cash management strategy. He added that the US situation also calls for a risk-off approach.

The 10-year gilt yield suffered a drop of 8 basis points and is at 1.81% currently. On the other hand, the 1.75% bond which is due in September, 2022 added 0.68 and is at 99.45 now. The Pound has weakened against the Greenback by 0.1% and is at $1.6122. Pound dropped against Euro as well and is at 82.08 pence now, after declining by 0.2%.

The Income Strategist of RBC Capital Markets, Sam Hill stated that he is not much surprised to see the gilts gain all of a sudden. Sam added that such jumps are obvious because of the seasonal liquidity.

Incidentally, Pound has shown a growth of 0.4% against the USD since release of the industry report stating increased bank lending for UK home buys. In October, the number of approved bank loans was 33128 and the same has risen to 33634 in November. The report was published by the British Bankers’ Association. According to Stuart Cole, who works as the Currency Strategist of Mizuho Corporate Bank Ltd., UK economy is still weak, but it has left the worst phase behind.