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Bonds round up: Inflation knocks gilts

Date: Tuesday 19 Jan 2010

Bonds round up: Inflation knocks gilts

UK gilts fell sharply on the back of much higher than expected inflation figures.

The consumer prices index jumped to 2.9% in December, well above the Bank of England’s 2% target.

Factors such as the reduction in VAT to 15% from 17.5% from 1 December 2008, sharp falls in the oil price and pre-Christmas sales in response to the economic downturn brought about a 0.4% fall in CPI between November and December 2008.

The absence of these factors meant a sharp rise in inflation. The December rate of inflation is a rise of one percentage point from 1.9% in November.

Higher fuel and lubricant prices contributed to the rise in inflation, climbing by 0.2% from November, compared with a 6.2% drop between November and January 2008.

Clothes and footwear also contributed as retailers recovered from the poor trading of 2008 when they were forced to discount heavily.

The two-year gilt yield jumped by 11 basis points to 1.33%, while the ten-year yield was nine basis points higher at 4.03%.

US Treasury bond prices have declined following the US market’s reopening after yesterday’s Martin Luther King holiday.

The fall in bond prices led to a two basis point rise in the two-year yield to 0.89% and a three basis point increase in the ten-year yield to 3.7%.

German bunds are also declining but not as fast as gilts. The two-year yield rose four basis points to 1.18%, while the ten-year yield was three basis points higher at 3.28%.

Investor sentiment in Germany fell more than expected in January. The ZEW Indicator of Economic Sentiment for Germany decreased by 3.2 points in January to 47.2 points from 50.4 points in the previous month. Economists anticipated a smaller decline to 49.8.

The assessment of the current economic situation in Germany improved in January with the corresponding indicator rising by 4.0 points to minus 56.6 points.

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