On January 17th, British government bonds continued their rally for a third consecutive day, nearly erasing a significant surge in yields observed since the beginning of the year. This surge briefly drew parallels with those seen during the tenure of former Prime Minister Liz Truss in 2022.
Yields for various gilt maturities had dropped by approximately 6 basis points by 1200 GMT on that day. The decline was driven by unexpected data showing a decrease in UK retail sales in December, contributing to a series of lackluster economic indicators.
The 10-year gilt yield was at 4.622%, poised for its most significant weekly decrease since July, having fallen by 30 basis points from its peak of 4.925% on January 9th, the highest level since 2008.
The recent rise in yields, predominantly influenced by U.S. market shifts, had placed pressure on Finance Minister Rachel Reeves to meet fiscal requirements, possibly necessitating further tax hikes or spending reductions.
Following the increase in yields last week, the opposition Conservative Party in Britain questioned Reeves' credibility with the market, pointing to the bond market movements.
Nevertheless, the gilt market rebounded over the past three days, partly due to discouraging economic data and growing expectations of an interest rate cut by the Bank of England on February 6th.
Though the 10-year gilt yield has only risen by 5 basis points since the end of 2024, outperforming analogous bonds from all other G7 economies except the U.S., it remains approximately 0.35 percentage points higher than when Reeves presented plans for increased taxes and borrowing on October 30th.
Thirty-year gilt yields, which experienced the bulk of the sell-off, peaking at 5.472% on Monday - the highest since 1998, are now only 6 basis points above the year-end 2024 level of 5.17%.
Investors on Friday anticipated around 68 basis points of interest rate reductions by the Bank of England by year-end - equivalent to two to three 0.25 percentage point decreases, up from fewer than 50 bps earlier in the week.
"We still think this is on the low side – we continue to forecast 100 bps of cuts," noted Andrew Goodwin, Chief UK Economist at Oxford Economics. "If we're proven right on Bank Rate there's still scope for yields at the longer end to fall."