UK gilts sag on higher risk appetite; Q3 GDP data in focus

The UK gilts slumped Tuesday as investors moved away from the safe-haven buying amid gains in riskier assets including equities and crude oil.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 1 basis point to 1.092 percent, the super-long 40-year bond yield jumped 1-1/2 basis points to 1.586 percent and the yield on short-term 2-year bond climbed 1 basis point to 0.254 percent by 10:00 GMT.

This week, investors will remain keen to focus on the third-quarter GDP readings due to be released on Thursday, October 27. We foresee that the Q3 GDP to increase 0.3 percent q/q, from previous 0.7 percent. On an annual basis, it is likely to remain unchanged at 2.1 percent y/y.

The UK gilts have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the Bank of England's target. Crude oil prices edged up ahead of the release of U.S. crude inventory data, which in recent weeks has provided bullish surprises, but a flurry of top-level comments from OPEC members regarding chances of an output cut kept a lid on prices, Reuters reported. The International benchmark Brent futures rose 0.31 percent to $51.62 and West Texas Intermediate (WTI) also climbed 0.51 percent to $50.78 at 10:10 GMT.

According to a Bloomberg survey, more than 70 percent of economists are expecting the BoE to cut rates to 0.10 percent in November. This does not include us, as recent UK data have not provided justification for further easing, although recent MPC comments have remained dovish.

Last week, the acceleration of UK CPI inflation to 1.0 percent y/y from 0.6 percent in August occurs on the back of a 0.2 percent m/m increase and stands at its highest reading since November 2014. The m/m increase, driven higher by road fuel costs, clothing & footwear costs, hotel accommodation costs and gas prices, is actually consistent with the average m/m rise for a Sep month over the past 10 years.

Meanwhile, the FTSE 100 traded 0.35 percent higher at 7,010 by 10:10 GMT.