UK Gilt Yields Rebound on Strong Retail Sales

UK 10-year gilt yields rose to 5.25% on Friday after falling more than 10bps in the previous session, as investors digested stronger-than-expected retail sales and this week’s central bank decisions. UK retail sales rose 0.5% in August, defying expectations for a 0.2% decline and rebounding from July’s fall. Department stores led the recovery as retailers resolved stock availability issues, suggesting consumer spending remains resilient despite elevated energy prices and the prospect of tighter monetary policy. The Bank of England held rates steady on Thursday and said it would stop selling very long-dated gilts under its quantitative tightening programme, while warning that a prolonged Middle East conflict could prompt tighter policy. The Federal Reserve and Bank of Japan also raised rates this week and signaled scope for further tightening this year. Elsewhere, Brent crude continued to fall as concerns over Saudi supply disruptions eased.

UK 10-year gilt yields fell further toward 5.2%, retreating from 19-year highs, after the Bank of England held rates and announced a six-month pause in bond sales under its quantitative tightening programme. UK policymakers voted 6-3 to keep Bank Rate at 3.75% and warned that rates could rise if inflationary pressures intensify due to the conflict in the Middle East. The MPC also unanimously voted to reduce its stock of government bond purchases to zero through a multi-year programme, with sales and maturities averaging £46 billion a year through 2034, below the £50 billion pace expected by markets. The BoE expects inflation to reach twice its 2% target early next year, while raising its third-quarter GDP growth forecast to 0.4%. Meanwhile, the Fed raised rates by 25 basis points yesterday, its first hike since July 2023, and signaled another increase later this year. Oil prices fell for a second consecutive session but remained elevated amid continued uncertainty over the Middle East.

UK 10-year gilt yields fell back to around 5.3% as oil prices declined for a second consecutive session, with investors also digesting yesterday’s Federal Reserve rate hike ahead of the Bank of England’s closely watched policy decision. Brent crude is trading around $105 a barrel after Saudi Arabia said it plans to restore roughly half the capacity of its damaged East-West pipeline within days. The Middle East outlook remains uncertain, however, keeping oil prices elevated and adding to the challenge for central banks as they seek to contain inflation without putting excessive pressure on economic activity. The BoE is widely expected to leave rates unchanged in a close decision, but markets will be watching for clues on the future policy path. In the US, the Fed raised rates by 25 basis points, the first increase since July 2023, and signaled another hike later this year amid persistent inflation pressures.