UK gilts snap long winning streak on profit booking; likely to remain volatile for short-term

The UK gilts slumped Wednesday as investors cashed in profit after relishing long winning streak. Also, we expect the Treasury prices to remain volatile in the short-term until market digest Trump victory.

The yield on the benchmark 10-year gilts, which moves inversely to its price, rose 3-1/2 basis points to 1.250 percent, the super-long 30-year bond yield jumped 4 basis points to 1.928 percent and the yield on short-term 2-year bounced ½ basis point to 0.21 percent by 11:20 GMT.

The gilts prices gain early in the trading session after the United States Republican candidate Donald Trump pinned his victory against Democrat opponent Hillary Clinton in the 2016 presidential election.

Following this news, the global bonds prices surged as investors sought safe-haven assets. The U.S. 10-year bond yield fell 6 basis points to 1.80 percent, the Australian equivalents dipped 10-1/2 basis points to 2.256 percent, the UK 10-year gilt yield tumbled 3 basis points to 1.208 percent and the Japanese 10-year note yield inched 2 basis points lower to -0.08 percent.

Market is in panic as Trump's anti-trade stance would jeopardise trade with China and other emerging market economies. His anti-immigration policies could also create labour shortages in the U.S. economy. Business confidence would take a hit and new downside risks to the economy are likely to reduce the probability of a December rate hike by the Federal Reserve.

Trump’s victory is the latest political shock to financial markets, following the U.K.’s June vote to leave the European Union. Also, Trump, who compared his candidacy to the Brexit vote, has criticized Yellen, saying she kept rates too low during Obama’s tenure, and suggested that if he won he’d probably nominate someone else to lead once her term expires in 2018, reported Bloomberg.

Moreover, energy prices tumbled following the U.S. election result. The International benchmark Brent futures fell 1 percent to $45.58 and West Texas Intermediate (WTI) tumbled 1.27 percent to $44.41 by 09:20 GMT.

The Bank of England (BoE) left monetary policy unchanged at the November meeting that concluded on last Thursday, maintaining a more hawkish tone than what was anticipated by market participants. The board shifted from an easing bias to a neutral bias, saying that it "can respond in either direction".

Economic data has remained remarkably resilient to the Brexit uncertainties while the steep GBP depreciation means that CPI inflation will increase sharply next year. It seems that the BoE is quite satisfied that its actions have supported the economy and moved inflation back to higher levels consistent with the 2 percent target.

The BoE now expects higher short-term real GDP growth as economic data so far has been resilient. The bank also expects CPI inflation to be higher than the August projections as the GBP has depreciated further. The BoE expects CPI inflation to peak just below 3 percent in the coming years.

Meanwhile, the FTSE 100 traded 0.68 percent lower at 6,799 by 11:20 GMT.