UK assets remained under pressure on Friday from high global borrowing costs, with sterling weakening for a fourth straight day and better-than-expected US jobs data reinforcing the move, while gold yields rose to fifth day in a row.
After posting a modest decline the previous day, the pound extended its decline and gold yields jumped after US government data showed employers added more jobs than expected in December.
The pound weakened 0.53%, after briefly touching $1.2194, its lowest since November 2023.
The yield on 10-year government bonds rose three basis points (bps) today to 4.84%, down from a session high of 4.889% after the data was released. The yield remained below Thursday’s high of 4.925%, the highest since 2008.
The UK 30-year bond yield rose as much as 6.8 bps today to 5.447% – the highest since July 1998. It was last up 3 bps at 5.411%.
Britain has been one of the countries hardest hit by a spike in global borrowing costs, which most analysts say is coming from the US due to concerns about rising inflation, reduced chances of interest rate cuts and uncertainty over how US President-elect Donald Trump will fare. Trump will carry out foreign or economic policy.
This has sent 10-year US Treasury yields surging to their highest level since November 2023, propping up the dollar and sending shockwaves through other currencies and stocks.
Traders on Friday expected the US Federal Reserve to wait until at least June to lower its policy interest rate.
But the UK stock market is one of the worst hit, with sterling having lost 1.5% on the week, underperforming gold shares and domestically focused shares also struggling. (.FTMC).
PRESSURE ON THE FINANCE MINISTER
While higher yields can sometimes support a currency, that was not the case in this case, in part because higher yields put pressure on Finance Minister Rachel Reeves, potentially forcing her to cut spending in the future.
“There remains a clear concern about the possibility that the Chancellor’s entire fiscal space has now been drained by the gold sell-off, and the weak nature of UK economic growth,” said Pepperstone strategist Michael Brown, referring to Reeves.
Traders are paying more to hedge against major swings in the Pound than at any time since the banking crisis in March 2023.
One-month options volatility, a measure of demand for protection, hit a high of 10.9% on Thursday.
By Friday, this figure had fallen to 9.67%.
The pound has also lost around 1% against the euro this week.
Eurozone bond yields also rose, but the yield gap between the UK 10-year bond and the German 10-year bond – which is a measure of the premium investors demand for holding UK debt – widened by around 10 bps this week.
Deutsche Bank said in a note earlier on Friday that investors should sell the pound on a broad trade-weighted basis, and that there could be “a further step” in the pound’s recent weakness.
“We like to sell GBP against a basket of other major currencies,” they said, mentioning the euro, dollar, Swiss franc and Japanese yen.
They also noted that higher volatility could reduce the benefits of higher yields for the pound.
One reason why high yields can favor a currency is because it makes it more attractive for “carry trades” in which currency traders seek to profit from differences in returns between different markets.
However, these trades become less attractive when volatility is high, as small yield differences can be erased by price changes.
Ten-year tenor gold yields rose 25bps in a week. If maintained, this would be the biggest weekly gain in a year.
Source: Reuters (Reporting by Greta Rosen Fondahn, additional reporting by Amanda Cooper and David Milliken; Editing by Toby Chopra, Timothy Heritage and Hugh Lawson)
