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The Pound is Today's Best Performer as UK Bond Yields Rise

The cost of UK sovereign debt fell and the yield they return to investors rose in the wake of the latest debt auction carried out by the U.K. Government.

The results appears to have triggered a rise in the value of the British Pound with traders seemingly taking direction from money markets in the absence of details of Brexit negotiations.

Yields for long-dated Gilts rose following the auction by the Debt Management Office of £2.25BN worth of 1.5% Treasury Gilts due for maturity in 2047 .

The highest accepted price was £93.111 with a yield of 1.801%.

If we look at the impact this had on the long-dated yields in the market we see:

long dated gilts

Above: Long-dated UK bonds (gilts) dropped in price on strong demand. Image courtesy of IG.

In late morning trade the price of long-dated bonds issued by the UK government fell.

This means the yield offered by the bonds in the market spiked.

The Pound tends to track yields, as capital tends to flow from those jurisdictions offering low yield (Germany) to those offering high yield (U.K.).

This helps explain the 0.3% bump in the Pound-to-Euro exchange rate to 1.1378.

pound to euro reaction

Indeed, a look at comparative data shows the British Pound is today's best performing currency.

relative performance Pound

However, we caution that Sterling's gains are unlikely to stick heading into the final sessions of the week as we expect angst over the Brexit negotiation quagmire to remain at the forefront for traders.

The issue concerning markets is that of the Irish border and to us it looks as though a battle between Dublin and Belfast is underway - Dublin wants Northern Ireland to align to European Union standards, in order to avoid the erection of a hard border between the two nations. 

This in turn implies a border will be erected in the Irish sea, splitting the United Kingdom.

Northern Ireland's DUP are having none of it.

And in the middle is Theresa May who needs to broker an agreement over the issue in order to move the whole process along before next week's meeting of European Union leaders.

It is at this meeting that issues of trade and a tranistional agreement will be given the go-ahead - something UK businesses, and by extension the Pound, desperately need.

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