The recent surge in US Treasury yields has had a ripple effect on UK gilts, as the two markets have shown a strong positive correlation since late last year. This connection has been further emphasized by a robust US jobs market report, which has pushed Treasury futures lower in the Asian session, adding pressure on gilts. Domestically, the UK is grappling with rising inflation expectations, as evidenced by a 70 basis point increase in the two-year inflation breakeven rate since the autumn budget announcement by Chancellor Rachel Reeves. This has led to speculation that the UK government's fiscal headroom, previously estimated at nearly GBP10 billion, may be eroding, potentially necessitating spending cuts or tax increases.
The Bank of England's gradual loosening cycle is under scrutiny, with traders anticipating another rate cut in February. However, the steepening gilt curve has introduced uncertainty about the path beyond that. The upcoming UK inflation data release, expected to show a 2.6% rise in headline consumer prices for December, will be closely watched for further indications of inflationary pressures.
As of 02:00 on January 13, the 10-year Treasury yield (TNX) stands at 4.77, slightly down from its last close of 4.78. The ongoing dynamics between US and UK bond markets, coupled with domestic fiscal challenges, continue to shape investor sentiment and market movements.