UK gilts plunge as political unrest eases on arrival of new Prime Minister

The UK gilts plunged on Tuesday as the country’s political pressures eased following the election of new Prime Minister Theresa May. However, investors will majorly focus on the upcoming monetary policy meeting scheduled to take place on Thursday at 11:00 GMT.

The yield on the benchmark 10-year gilts rose 2-1/2 basis points to 0.783 percent, yield on super-long 30-year bonds jumped nearly 2 basis points to 1.627 percent and the yield on short-term 2-year bonds bounced 1-1/2 basis point to 0.174 percent by 10:00 GMT.

Moreover, the Bank of England is also expected to ease interest rates in its monetary policy meeting scheduled to be held on July 14, in an attempt to ease the growing anxiety over the possible breakdown after the Brexit outcome.

The UK as it could herald the first BoE Bank Rate cut since Feb 2009. There is a low probability, but non-negligible risk, that the central bank also resumes its programme of asset purchases, financed through reserves issuance, although this is more likely in August. So it is likely that we see a 25 basis points rate cut on Thursday that takes the Bank Rate down to a record low 0.25 percent.

The BoE governor Mark Carney, speaking at the Parliamentary TSC hearing on the FSR, said that the MPC needs to consider that the softer economic outlook could warrant a monetary response. He adds that he wants to make it clear to households and businesses that credit is available for the right mortgages and business ideas, and stresses that it is credit demand and not credit supply constraints that will determine the future of credit growth (considering that the BoE has already moved to bolster banks' lending capacity by creating lower counter-cyclical bank capital buffers that will take some time to be used up).

Moreover, the Moody's, a bond credit rating company lowered its UK growth forecasts due to the Brexit vote, to 1.5 percent for this year, down from 1.8 percent in its earlier forecast and to 1.2 percent for 2017 (sharply lower from 2.1 percent).

Meanwhile, the FTSE 100 trading higher 0.06 percent at 6,687 by 10:00 GMT.