Gilts post best week since July after run of poor economic data

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Gilts posted their best week since July and the FTSE 100 hit a record high on Friday after a string of weak data weighed on sterling and prompted bets the Bank of England will cut rates more aggressively to kick-start growth.

The rally in UK government bonds continued on Friday after official figures showed that retail sales unexpectedly fell in December, raising the risk of an economic contraction late last year.

10 years old gilded the yield fell another 0.02 percentage points to 4.66 percent, bringing it to 0.18 percentage points this week.Yields move against prices.

Signs of weakness on the high street are disappointing GDP: November figures and lower-than-expected inflation in December The IMF on Friday forecast UK growth to pick up this year, but expansion is still set to be slower than in the US and Canada.

The FTSE 100 rose 1.4 percent, surpassing its previous record high set in May, helped by a weaker pound.Many of the blue-chip index companies earn dollars, meaning they benefit from a stronger U.S. currency.

“Better inflation news allows gilts to become the safe haven that the market now increasingly feels it needs in the UK,” said Gordon Shannon, portfolio manager at TwentyFour Asset Management.

Rising expectations of interest rate cuts to support the faltering economy “made it easier for foreign buyers to retreat.” [and buy gilts]Shannon added.

The two-year yield fell 0.02 percent to 4.37 percent on Friday, extending its decline to 0.17 percent this week.Sterling was down 0.6 percent against the dollar at $1.217.

“It’s more than the weakness of the pound,” said Luca Paolini, chief strategist at Pictet Asset Management. “I think the UK is attractive as a market,” he added it is “cheap” on a valuation basis and “well diversified”.

Traders now expect at least two quarterly rate cuts this year from the current level of 4.75 percent, and about a two-thirds chance of a third cut, according to implied levels in swaps markets.

Despite the gilt market’s rally, the 10-year yield is well above the 3.75 percent level it hit in mid-September, before a sell-off in Treasuries and fears that the U.K. is struggling with stagflation, with persistent price rises, is a challenge for the Bank of England reduce interest rates.

High yields pushed Britain’s borrowing costs to a 16-year high last week. 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 seriously hampered the chancellor’s priority, which is at odds with his fiscal rules gilt investors warned that the government may be forced to raise taxes or cut spending to maintain market confidence.

In its World Economic Outlook update, the IMF said on Friday that Britain’s economy would grow by 1.6 percent in 2025, up 0.1 percentage point from its previous forecast and up from 0.9 percent last year at a pace of 1.5 percent in 2026, it said.

The forecast was welcomed by Reeves, who said the IMF forecast suggested the UK would be the fastest growing “major European economy” over the next two years. “I will go faster and faster in my mission to grow through smart investment and relentless reform, and deliver on our promise to improve living standards in every part of the UK,” he said.

But traders betting on lower interest rates were encouraged by a speech earlier this week One of the central bank’s rate-setters said it may be necessary to cut interest rates five or six times over the coming year to support the economy.

Alan Taylor, a member of the Monetary Policy Committee, warned that the latest UK data pointed to a “gloomier outlook for 2025”, as he argued that the central bank should take preemptive action to support the economy with lower borrowing costs.

While expectations of lower interest rates will provide some relief to the chancellor when it comes to UK government borrowing costs, the accompanying poorer growth prospects could weigh on the fiscal outlook if the weakness is judged to be permanent.

The Office of Government Budget Responsibility will present its new economic and fiscal perspectives on March 26, to which the Chancellor will respond with a statement to Parliament.

UK gilts were helped by a fading tailwind from US Treasuries, which also rose as data showed weaker inflationary pressures in the US economy, which pushed the 10-year Treasury yield to 0.16 this week down a percentage point to 4.61 percent.