UK Bond Yields Tumble After British, US Inflation Data

UK bond yields have tumbled following the release of softer-than-expected inflation data in both the UK and the US. The 10-year gilt yield fell below 4% on Wednesday, indicating a decrease in borrowing costs and an increased likelihood of rate cuts by the Bank of England. This move comes as a surprise to many investors, who had been expecting higher inflation and tighter monetary policy.



The market reaction to the inflation data has been positive, with the FTSE 100 closing up 1.2% on Wednesday. Investors are now pricing in an additional 25bps reduction in UK interest rates this year, with just over 50bps worth of cuts expected for the year as a whole. The probability of the BoE cutting by 25bps next month has risen to about 90%.

However, it is important to note that the UK is not alone in experiencing a fall in bond yields. US and German bond yields have also risen in recent weeks, indicating that the movements in bond yields are part of a broader global trend rather than a UK-specific issue. This is somewhat reassuring for the UK, as it suggests that investors are not treating the country differently from other major economies.



Despite the positive market reaction, there are still concerns about the UK's fiscal position. The continued market rout reflects rising borrowing costs, persistent inflation, and weak economic growth, threatening Labour's slim £9.9 billion fiscal headroom. The pound has also dropped to its weakest level since November 2023, further exacerbating these concerns.

In conclusion, the fall in UK bond yields following the release of softer-than-expected inflation data is a positive development for the UK economy. However, it is important to remain vigilant about the potential risks and uncertainties that still exist, particularly with regards to the UK's fiscal position and the global economic outlook.