By Greta Rosen Fondahn
(Reuters) – British assets remained under pressure on Friday from elevated global borrowing costs, with sterling falling for the fourth day in a row and gilt yields rising for a fifth consecutive day, though both were off the previous session’s most extreme levels.
The pound was down 0.12% against the dollar at $1.2292 , having slid 0.3% earlier in the day, and hovered close to Thursday’s 14-month low of $1.2239.
Benchmark 10-year gilt yields edged up 3 basis points (bps) on Friday to 4.84%, but remained below Thursday’s high of 4.925%, their highest since 2008.
The UK has been among the markets most hit by a surge in global borrowing costs, which most analysts say originated in the U.S. due to concerns about rising inflation, reduced chances of a drop in interest rates, and uncertainty over how U.S. President-elect Donald Trump will conduct foreign or economic policy.
That sent benchmark 10-year Treasury yields to their highest since April, propped up the dollar while sending ripples through other currencies and stocks.
But Britain has been among the worst hit, with sterling having lost 1% on the week, gilts underperforming peers and domestic focused stocks also struggling.
Ten-year gilt yields are up over 20 bps on the week, and if sustained that would be their biggest weekly increase in a year. 30-year yields have risen 24 bps, also their biggest jump in a year, and were last 5.40%.
While higher yields can sometimes support a currency, they are not in this case, in part because they are putting pressure on finance minister Rachel Reeves, potentially forcing her to cut future spending.
“There remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in gilts, and the anaemic nature of UK economic growth,” said Michael Brown, strategist at Pepperstone.
Traders are paying more to hedge against big swings in the pound than at any time since the March 2023 banking crisis.
One-month options volatility, a measure of demand for protection, hit a high of 10.9% on Thursday.
By Friday, this had retreated marginally to 10.03%.
While largely flat against the euro on the day at 83.79 pence to the common currency, the pound has also lost about 1% there this week.
Euro zone bond yields have also risen, but the yield gap between British 10-year gilts and German 10-year bonds – a gauge of the premium investors demand to hold Britain’s debt – widened about 10 bps this week.
Deutsche Bank said in a Friday note investors should sell the pound on a broad trade-weighted basis, and that there might be “further to go” in the recent pound weakness.
“We like selling GBP against a basket of other major currencies,” they said, mentioning the euro, dollar, Swiss franc and Japanese yen.
They also noted that the higher volatility helps reduce the benefit for the pound of higher yields.
One reason why high yields can support of a currency are because they make a unit more attractive for ‘carry trades’ in which traders play yield differentials between different markets.
These trades are much harder when volatility is high as small yield differentials can be wiped out by price swings.
Investors are now looking ahead to key U.S. jobs data published later in the session, to confirm their view that U.S. rates could stay higher for longer, which could cement the dollar’s rally further.
(Reporting by Greta Rosen Fondahn, additional reporting by Amanda Cooper; Editing by Toby Chopra)
