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British bonds were on track for their best week since July, and the FTSE 100 index hit a record high on Friday after a series of weak data weighed on the pound and boosted bets that the Bank of England will cut interest rates more aggressively to stimulate growth.
The rise in British government bonds accelerated on Friday after official figures showed retail sales unexpectedly fell in December, raising the risk of the economy contracting at the end of last year.
The 10 years doctrine The yield fell another 0.04 percentage point to 4.64 percent by late afternoon trading, bringing its decline to 0.2 percentage point this week. Returns move inversely with prices.
Signs of weakness on Main Street are disappointing gross domestic product November numbers and December inflation reading were lower than expected. The International Monetary Fund on Friday afternoon expected growth in the United Kingdom to rebound this year, but expansion remains slower than in the United States and Canada.
The FTSE 100 index rose 1.5 percent, surpassing the previous record high set in May, supported by a weaker pound. Many of the companies included in the blue-chip index are dollar-denominated companies, meaning they benefit from the strength of the US currency.
“Better news on inflation makes government bonds the safe haven assets the market now increasingly feels it needs in the UK,” said Gordon Shannon, portfolio manager at TwentyFour Asset Management.
Shannon added that growing expectations of interest rate cuts to support the sluggish economy made it “easier for foreign buyers to come back (and buy government bonds).”
The two-year yield fell by 0.03 percentage points to 4.35 percent on Friday, bringing its decline this week to 0.18 percentage points. The British pound fell 0.5 percent against the dollar to $1.219.
“It's more than just the weakness of sterling,” Luca Paolini, chief strategist at Pictet Asset Management, said of the rising FTSE. “I find the UK attractive as a market,” he added, saying it was “cheap” for valuation reasons and “well diversified.”
Traders now expect at least two cuts of a quarter of a percentage point this year from the current level of 4.75 percent, and about a two-thirds chance of a third cut, according to the levels included in the swap markets.
Despite the rally in the government bond market, 10-year yields remain well above the 3.75 per cent level they were in mid-September, before the Treasuries-driven sell-off and fears that the UK is facing stagflation – as sustained rises in rates lead to… It is difficult for the Bank of England to cut interest rates.
This has seen UK borrowing costs rise to their highest level in 16 years last week, and as yields rise Attracting a wave of retail investors But also forcing Chancellor Rachel Reeves to defend her economic plans to MPs.
The rise in borrowing costs has severely limited the chancellor's leeway against self-imposed fiscal rules. big Gilt investors have been warned The government may have to increase taxes, or reduce spending, to maintain its credibility with the market.
In an update to its global economic forecasts, the International Monetary Fund said on Friday that the UK economy will grow by 1.6 per cent in 2025 – an increase of 0.1 percentage point on the previous forecast and up from 0.9 per cent last year. Growth in the UK will continue at a similar pace of 1.5 percent in 2026, she added.
Reeves welcomed the forecast and said the International Monetary Fund forecasts the UK will be the fastest-growing “major European economy” over the next two years. “I will go further and faster in my mission to deliver growth through smart investment and sustained reform, delivering on our promise to improve living standards in every part of the UK,” she said.
But traders betting on interest rate cuts were encouraged by A speech earlier this week One of the central bank's rate-setters suggested that it may need to cut interest rates five or six times over the next year to support the economy.
Alan Taylor, a member of the Monetary Policy Committee, warned that recent UK data pointed to an “increasingly bleak outlook for 2025”, as he said the central bank needed to take precautionary measures to support the economy with lower borrowing costs.
While expectations of interest rate cuts will provide some relief to the Chancellor when it comes to UK government borrowing costs, the accompanying weak growth outlook could have a negative impact on the fiscal outlook if the weakness is judged to persist.
The government's Office for Budget Responsibility is due to present its new economic and fiscal forecasts on March 26, and the Chancellor is due to respond with a statement to Parliament.
UK bonds were supported by late winds from US Treasuries, which also rose as data showed weak underlying inflation pressures in the US economy. That led to the 10-year Treasury yield falling 0.17 percentage point this week to 4.61 percent.
