Spike in gilt yields isn’t just about the UK economy

This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

All eyes on the US jobs report
The US non-farm payrolls report for December will be released later on Friday. Economists expect it to show an increase of 155,000 jobsdown from 227,000 in November, and the unemployment rate remained unchanged at 4.2%. Analysts from Goldman Sachs and Citigrouphowever, think both numbers will be worse than the consensus forecast.

American markets dark, European markets close higher
American markets were closed on Thursday in honor of former US President Jimmy Carter, who died at the end of December at the age of 100. Asia-Pacific markets down on Friday. Japan’s Nikkei 225 declined around 1%, leading losses in the region, as data showed household spending in November fell less than expected. China’s CSI 300 lost 1.25% after the People’s Bank of China suspended bond purchases.

All-time lows for Chinese 10-year bond yields
Chinese sovereign bonds have seen a strong rally since December, with 10-year yields up. falling to all-time lows this month after falling by about 34 basis points, according to LSEG data. The loan application from consumers and businesses in China was lackluster, which caused the banks to scoop up government bonds, pressurizing yields.

Fed governor thinks December cut should be ‘final step’
The Governor of the Federal Reserve of the United States, Michelle Bowman, said that the Fed December interest rates it should be his “final step in the policy recalibration phase.” This suggests that Bowman, who is a voting member of the Federal Open Market Committee, could oppose more cuts this year. Other Fed officials who spoke this week were more optimistic about the rate cut.

(PRO) UK small and mid-cap stocks to buy
There may be some questions about the strength of the British economy right now. But Barclays continues to see investment opportunities in the country, naming three small and mid-cap stocks it is betting on now – with two of them having a an implied upside of more than 40%.

Long-term borrowing costs for the British government are currently at a almost three decades high. From 6 am London time, the performance on the 30 golden years was 5.359%, its highest level since 1998.

The yield on gilts – a fancy British term for government bonds like US Treasuries – rose after the UK Debt Management Office on Tuesday. sold at auction £2.25 billion ($2.83 billion) of gilts with a 30-year maturity.

Typically, bond yields rise in response to higher interest rates, which remain high when inflation remains stubbornly above most central banks’ 2% target.

In the UK, this is a problem. General inflation it increased to 2.6% in Novemberon an annual basis, the second consecutive monthly increase.

Worse, in October, the gross domestic product of the United Kingdom contracted 0.1% on a monthly basis, raising the specter of stagflation – when an economy struggles with high inflation and a stagnant economy.

Plans from the Labor government to raise rates and significantly increase lending have also put pressure on gilt prices, which move in the opposite direction to yields.

Also consider currency movements. Higher yields on government bonds often translate into a stronger currency, because the returns attract global investors who increase demand.

U British poundhowever, it fell against the US dollar even as gilt yields rose.

Taken together, these factors paint a picture of a fragile economy, so it seems natural for investors to demand a higher yield if they borrow UK government money.

But we must not exaggerate the situation. Consider the Liz Truss disaster”mini-budget” of 2022, which caused a massive sales in gilts and a jump in yields in a matter of days (yields usually move at a glacial pace).

During this period, the 30-year US Treasury yield was about 3.5%. On Friday, it was at 4.9%, which means that gilts are keeping pace with Treasurys rather than running into a pile. In other words, the recent rise in gilt yields is not necessarily due to the turmoil in the UK, as bond yields, interest rates and inflation fears remain high in the world

It is always scary when a country’s financial markets experience ruction. When others have faced the same problems, maybe it makes the scenario a little easier to bear.

— CNBC’s Chloe Taylor, Jenni Reid, Karen Gilchrist and Elliot Smith contributed to this report.