Since the general election result in May UK gilt prices have pushed higher as the new government has resolved to take steps to rein in the deficit, and cut back on spending.
This resolve has boosted the pound and in turn made UK gilts a much more attractive proposition, in turn cutting the cost of servicing that debt as investors buy back into the UK gilt market and in the process drive gilt yields close to 5 year lows.
Recent economic data has provoked some optimism that the UK will avoid a double-dip recession and this has also buoyed gilt prices, as well as sterling, which today made a new 11 month high against a basket of currencies.
This Friday’s first revision of Q2 UK GDP could well give some additional clues as to whether the recent surprise jump in GDP is sustainable into Q3. The revision is expected to be unchanged from the original figure of a rise of 1.1%
The last time gilt prices were around 125.60 was back in March 2009 at around the same time, the spread trading markets, the FTSE hit its low point of 3,460. Since then, while gilt prices have reversed pretty much all those losses, equities have not.
UK gilts have also benefitted from a certain amount of safe haven buying in the face of concerns about problems in Europe and potential spending increases in the US.
The 3% level represents a significant support level, a break of which could well deliver further gilt price gains and lower yields.
In the short term this level could well be a tough nut to crack prompting price pullbacks towards 123.60, or around 3.20%, due to some potential dark clouds on the horizon with respect to the October spending review, which could presage some tensions within the coalition government, as well as possible public sector union unrest in the face of future spending cuts.
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By James Hughes, Analyst, CMC Markets.
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