Sterling tiptoes lower; 40-year gilt auction, BoE speakers in focus
LONDON: The pound trod water on Tuesday, holding mostly steady against the dollar and the euro, ahead of a raft of Bank of England speakers and an auction of long-dated government bonds that may offer a gauge of investor confidence in Britain's finances.
Sterling was last down 0.15% against the dollar at $1.352, near last month's more-than three-year highs. The euro was also stable against the pound at 84.45 pence.
Investors are torn between having to navigate the turbulence across markets stemming from the U.S. administration's erratic tariff policies and growing concern about the long-term finances of developed economies.
Long-dated bonds in the United States, Japan and the UK in particular have been punished hard, which has pushed yields up sharply. In the case of the UK, 30-year gilt yields are the highest among developed economies, at 5.36%. Their extra premium over 30-year U.S. Treasuries, which are yielding some 5%, is not the result of better growth expectations, but of more precarious financing, which has stirred up extra volatility for the pound.
On Tuesday, British 30-year government bond yields fell to a four-week low of 5.341%, down 7 basis points on the day and slightly outperforming U.S. Treasuries ahead of the auction of 1.25 billion pounds ($1.69 billion) of 2063 gilts.
Sterling set for fourth monthly rise against dollar
Bank of England Monetary Policy Committee member Catherine Mann suggested late on Monday the central bank should reconsider the pace at which it sells gilts, as the rise in long-dated yields could not be adequately offset by cutting rates faster.
Strategists at RBC said Tuesday's bond auction was small by historic standards, which should boost demand, although they were less attracted by the longer-term prospects for the bond due to the prospect of more supply in that maturity bracket.
'In the lead up to the UK's bond auction, UK gilts are outperforming across the curve and yields are falling. This suggests that bond vigilantes are out of sight for now, and that the bond market is not expecting any problem in today's auction,' XTB research director Kathleen Brooks said.
In domestic news, Thames Water, Britain's biggest supplier, said on Tuesday that U.S. private equity firm KKR had pulled out of a multi-billion pound rescue plan, reigniting fears the company will need to be nationalised to avoid financial collapse.
The government has said it is on standby in case Thames Water fails to recapitalise and needs to go into temporary nationalisation to keep services running.
BoE Governor Andrew Bailey, Deputy Governor Sarah Breeden, Mann herself and external MPC member Swati Dhingra are due to appear before a parliament committee at 0915 GMT.
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