Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Gas price explosion jolts UK bond market

Published 06/10/2021, 13:07
Updated 06/10/2021, 13:55
© Reuters. FILE PHOTO: The Bank of England can be seen as people cycle through the City of London financial district, in London, Britain, June 11, 2021. REUTERS/Henry Nicholls

© Reuters. FILE PHOTO: The Bank of England can be seen as people cycle through the City of London financial district, in London, Britain, June 11, 2021. REUTERS/Henry Nicholls

By Andy Bruce

LONDON (Reuters) - Britain's government bond market is showing signs of strain from the country's energy crisis, with headlines about gas prices sparking heavy selling this week - a new development that points to growing unease over inflation expectations.

There was disarray in Britain in recent days as a deficit of truckers left fuel pumps dry across the land and a spike in European wholesale natural gas prices tipped energy companies into bankruptcy.

Just as Prime Minister Boris Johnson denied the country had fallen into chaos, investors singled out the 2 trillion pounds ($2.7 trillion) gilt market for some of the heaviest selling among major government bonds.

The 10-year gilt yield, which moves inversely to the price, hit its highest level since May 2019 at 1.152% on Wednesday as the British wholesale gas contract for day-ahead delivery breached 3 pounds/therm for the first time.

GRAPHIC-UK wholesale gas prices hit new record https://fingfx.thomsonreuters.com/gfx/polling/zgpomboqrpd/Pasted%20image%201633523530039.png

Until this week gilts had moved in typical fashion in response to economic data and Bank of England commentary about the economic outlook.

That changed on Tuesday, when a Bloomberg headline about rocketing British wholesale gas prices at 1345 GMT prompted rapid selling.

The 10-year yield jumped by more than 2 basis points within a 10 minute period - equivalent to the move that immediately followed last month's BoE policy statement.

Another newswire headline about gas prices, this time from Reuters at 1435 GMT, prompted more selling.

Peter Chatwell, head of multi-asset strategy at Mizuho International, said there had been "discomfort" among some gilt investors badly positioned for the prospect of a BoE interest rate hike this year.

"This all comes down the repricing which is taking place at the very front end of the curve - so the possibility of a hike in just under a month's time," Chatwell said.

"That's the difficult thing for the market and that's why it is linked to very near term developments in energy prices."

Recent moves in gilts are likely to attract the attention of BoE officials, who are trying to gauge the economic impact of widespread supply chain disruption, labour shortages and a failing energy market.

Some policymakers are concerned that investors and consumers could lose confidence in the central bank's ability to contain inflation, raising the prospect of higher interest rates even as the economy is showing clear signs of slowing.

Britain's inflation-linked gilt market suggests retail price inflation, an outmoded measure but still used by utility companies as a benchmark for bills, will rise to around 7% by April 2022 - a level last seen in the early 1990s.

Deutsche Bank (DE:DBKGn) investment strategist Jim Reid said Tuesday's 10 basis point rise in British 10-year breakeven rates - another reflection of long-term inflation expectations in the market - was "incredible".

As of Wednesday, financial markets priced in a roughly 90% chance of a 15 basis point hike in interest rates by the BoE by the end of the year.

BOE PUSH BACK?

The recent big swings in gilt prices are likely to interest BoE officials who are monitoring the functioning of the gilt market ahead of the completion of its 875 billion pound programme of bond purchases, scheduled for the end of the year.

The government will also be monitoring the gilt market ahead of an update on the public finances on Oct. 27, after Britain borrowed more than 320 billion pounds in the last financial year to pay for its response to the COVID-19 pandemic.

The lack of clarity over the outlook suggests a return to calm in the market might be a little way off.

"The inflation we're currently seeing is obviously for real, but nobody really knows how much is transitory, how long these bottlenecks will last, how long commodity prices will increase, and so on and so on," RBC global macro strategist Peter Schaffrik said.

Chatwell from Mizuho said it was possible the BoE might in the coming weeks try to steer the market away from its aggressive pricing of rate hikes if it felt this had gone too far.

© Reuters. FILE PHOTO: The Bank of England can be seen as people cycle through the City of London financial district, in London, Britain, June 11, 2021. REUTERS/Henry Nicholls

"That could be where some less hawkish rhetoric, to provide some more clarity, could materialise. They would need to deliver that effectively by two weeks before that Nov. 4 meeting at the latest," Chatwell said.

($1 = 0.7380 pounds)

Latest comments

The other British Bond who will have trouble in future goes by the name James. He's out of a job bcz some lady took his spot.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.