At Tricio we look at charts in order to gauge investor sentiment and behaviour. We looked at rising UK Gilt yields in our most recent Weekly Talking Points and shone our Spotlight on this risk.
The first UK Budget under the new Labour government was a huge success on a relative basis, as unlike the ‘mini-budget’ from PM Truss and Chancellor Kwarteng in 2022 the GBP is not falling out of bed and yields have only rallied a bit, not spiked higher.
In our most recent Tricio Focus John Calverley, Tricio’s Chief Economist, goes over the Budget from Chancellor Reeves. John suggests that those looking for increased productivity and a real rise in sustained economic activity over time will need a bit of luck. The risk is that growth will be ‘goosed’ for a limited amount of time, but the increased debt burden may be a problem and growth may remain lacklustre after the initial bump higher.
The market took a few minutes to take this onboard on Wednesday and yields in the UK 10-yr. gilt were flat lining around 4.21% until the penny dropped that a lot more debt issuance was in the pipeline. Yields are now bumping into 4.5% which is not that far from the Truss ‘what the heck are you doing to the economy!?!?!’ 4.6% yield peak from late 2022. The difference of course is that gilt yields were around 3.5% when Chllr Kwarteng started his mini-budget on 23rd September and were near 4.6% on 12th October (he was sacked on 14th October). So give this a few weeks and see where we end up?
Ahead of that we can look at the long term gilt yield chart (weekly, below) for clues as to potential directional risk. The shift above 3% was a big deal (lower red line) as this has served as a ‘pivot point’ as support and resistance for the gilt yield. The risk is that yields push higher above the 4.75% area high from 2023 and test the 5% area with the next big resistance level near 5.6% (2007 peak area) and then the 6% area (Fibonacci retracement area and a key low area).
The shorter term chart below underlines the rejection of the attempt to break below 3.75% in September 2024, with yields rising pretty sharply since then. UK economic data has turned up a smidgen lately and core inflation remains a bit sticky, which could explain some of the yield upswing, along with some anticipation that the Labour government would seek to borrow more money in order to accomplish some of their goals. Yields may have also been ‘too low’ as the run up to the Fed’s jumbo rate cut pretty much coincides with the yield low in September – buy the rumour, sell the fact?
If the push above the 4.4% area (yield high in May 2024) is sustained things will remain sticky for gilt holders, with the 4.6% area key resistance pretty much at hand. A break of the latter would shift the focus to the 4.75% 2023 peak area, with 5% and higher at risk after that. From a chart perspective we can cling to the view that a long term yield top is unfolding, until we are proven wrong. In this case, look for the towel to be thrown in on pushes above 4.75% as potential head and shoulders top ideas morph into potential rounding tops or double top and then it looks like a bull extension, yikes! For now, still leaning to a top forming, but gilt fans need to see yields fall back to the 4.2% area to give some ‘technical’ comfort, with a drop back to 4% and then lower expected to follow if this is actually a yield top forming. 3.75% is key on a long-term view as support to break on a sustained basis.
If you would like a copy of our Focus on the UK Budget please contact us at info@tricio-advisors.com.
Gerry Celaya, Chief Strategist
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