The UK gilt yields recovered on Tuesday as investors cooled on safe-haven instruments amid gains in riskier assets including crude oil and equities. The yield on the benchmark 10-year gilts, which moves inversely to its price rose more than 5-1/2 basis points to 0.991 percent, yield on super-long 30-year bonds jumped 3 basis points to 1.839 percent and the yield on short-term 2-year note bounced nearly 6 basis points to 0.208 percent by 10:50 GMT.
The British 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. Today, oil prices rose as investors took advantage of a two-day slide in crude following Britain's vote to leave the European Union to lock in lower prices.
A looming strike at several Norwegian oil and gas fields threatened to cut output in western Europe's biggest producer, also helped support prices on Tuesday. The International benchmark Brent futures rose 2.53 percent to $48.98 and West Texas Intermediate (WTI) climbed 2.48 percent to $47.48 by 10:50 GMT.
Moreover, the UK stocks pushed higher Tuesday, gaining after two sessions of heavy losses sparked by the country’s vote to exit the European Union. The FTSE 100 trading up 2.45 percent at 6,129 by 10:50 GMT.
In addition, UK finance minister Osborne said that it is crucial to provide fiscal stability and the UK is in prolonged period of economic adjustment. Said decisions on taxes, spending to come under new PM and absolutely going to have to cut spending and raise taxes.
He further added that he stands by decision to hold referendum and pro-Remain candidate can become PM, not backing any runners for the moment. Own role in next government depends on new leader, he said.
On Monday, the 10-year UK yield dropped through and settled about 5 basis points below the 1.00 percent mark for the first time, as flight to quality flows accelerated and BoE rate cuts get priced in. The central bank may well cut rates by 25 basis points in August.
The 10-year Gilt/Bund yield spread is meanwhile narrowing towards the 100 basis points mark for the first time since 2013. Considering that it went below zero in 2011 and 2009, the spread could easily come down further as the UK/EUR money-market spread of approximately +80 basis points gets whittled down. The 2-year UK yield has now dropped to a 4-year low in the mid-teens but could potentially hit single digits.
On the other hand, the S&P announced that it has cut the UK’s sovereign credit rating to AA, from previous from AAA. According to S&P, the outcome of the UK’s EU referendum will lead to less predictable, stable, and effective policy framework in the UK.
The S&P, an American financial services company also added that they have reassessed their view of the UK's institutional assessment and now no longer consider it strength in their assessment of the rating.
Similarly, rival agency Fitch lowered UK’s sovereign credit rating from AA+ to AA, forecasting an "abrupt slowdown" in growth in the short-term.
