UK yields finish week near 3-month high before key Brexit vote

Credit: REUTERS/Phil Noble

British government bond yields finished the week near a three-month high on Friday, a day before Prime Minister Boris Johnson seeks parliament's approval for a new deal to leave the European Union.

LONDON, Oct 18 (Reuters) - British government bond yields finished the week near a three-month high on Friday, a day before Prime Minister Boris Johnson seeks parliament's approval for a new deal to leave the European Union.

Ten-year gilt yields GB10YT=RR were on track to finish 4 basis points up on the day at 0.72%, a few basis points short of a three-month high of 0.793% struck on Thursday when optimism about a smooth Brexit transition was at its peak.

Investors have sold gilts as the chances of an economically disruptive no-deal Brexit have diminished, reducing the appeal of safe-haven assets and pushing up yields as the chances of a hefty Bank of England rate cut fade.

Johnson faces a battle to win a majority for his deal in parliament, where his Conservative Party lacks a majority and faces opposition from the Labour Party - who say the deal does too little to preserve EU worker protections.

In the longer term, economists predict Britain's economy will underperform if Johnson gets his way and distances Britain from its current close trade and regulatory ties with the EU.

"For the market the rising chances of a deal has meant the probability of both no deal and a soft Brexit have seemingly shrunk, with this deal increasing the chances of a hard Brexit in the long run," Bank of America Merrill Lynch gilts strategist Sebastien Cross said in a note to clients.

"The combination of avoiding the short run disruption of a no deal but raising the chances of a long run outcome that is bad for the UK economy has led to outright rates moving higher but the curve remaining relatively flat by historical standards," he added.

Gilt yields got a boost early on Friday after BoE Deputy Governor Dave Ramsden said he could see a case for BoE rates to move higher in a smooth Brexit transition, striking a less dovish tone than other BoE officials have in recent weeks.

Financial markets price in a one-in-three chance of a 25 basis point rate cut in Bank Rate before Governor Mark Carney is due to step down at the end of January BOEWATCH.

But the gilt market was fairly subdued ahead of Saturday's vote, which will set the tone when trading restarts on Monday.

Cross forecast yields would move 90 basis points higher by the year's end if parliament passes Johnson's deal, versus a 50 basis point rise in the more likely case that parliament blocks the deal, triggering a delay to Brexit and a national election.

Dec long gilt future FLGcv1 131.78 (-0.14)

Dec 2019 short sterling FSSZ9 99.275 (-0.01)

June 2020 short sterling FSSM0 99.30 (-0.01)

10-year gilt yield GB10YT=RR 0.72% (+4 bps)

-------------------KEY MARKET DATA---------------------------

Long Gilt futures 0#FLG: Gilt benchmark chain 0#GBBMK=

Short Stg futures 0#FSS: Cash market quotes GB/GILT1

Deposit rates DM= Sterling cross rates GBPX1=

UK debt speedguide GB/DEBT

-------------------KEY MARKET REPORTS--------------------------

Gilts GB/ Sterling GBP/

Euro Debt GVD/EUR Dollar USD/

U.S. Treasuries US/Debt reports DBT

--------------------GILT STRIPS DATA -------------------------

Gilt strips data GB/STRIPS1 All gilt strips 0#GBSTRIP=

Gilt strips IO 0#GBSTRIPIO= Gilt strips PO 0#GBSTRIPPO

(Reporting by David Milliken Editing by Alexander Smith and Elaine Hardcastle)

((david.milliken@reuters.com; +44 20 7542 5109; Reuters Messaging: david.milliken.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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