FX.co ★ UK Gilt Yields Hold Near Multi-Year Highs

The UK 10-year gilt yield hovered around 5.4%, close to multi-year highs, as investors weighed stronger-than-expected inflation and rising public borrowing ahead of next week’s budget and the Bank of England’s 5 November policy meeting. Headline inflation rose to 3.5% in September, above the 3.4% consensus, with both core and services inflation also surpassing forecasts.

At the same time, public sector net borrowing climbed to £24.5 billion, higher than a year earlier and above market expectations. Borrowing between April and September reached £97.8 billion, overshooting the Office for Budget Responsibility’s March projection by £6 billion. Despite this deterioration in the fiscal position, some major investors expect the forthcoming budget to stress fiscal discipline, which could underpin demand for gilts.

In addition, resilient economic data — including a decline in unemployment and an unexpected expansion in GDP — have strengthened expectations of further monetary tightening, with markets currently pricing in a 25-basis-point rate increase in November.