(Bloomberg) -- U.K. bonds headed for the biggest gain in a week as cracks began to show in the Brexit compromise agreed upon between Prime Minister Theresa May’s government and the European Union.
Benchmark 10-year notes snapped a two-day drop, while the pound edged lower as EU envoys made clear that the bloc will halt the next phase of talks if Britain tries to unpick the deal agreed last week. Ministers including Brexit Secretary David Davis had sent signals over the weekend that the U.K. wasn’t really committed to what it signed up to, although he has since distanced himself from the comment. The U.K.’s yield curve bull flattened, supported by a lack of debt supply heading into the end of the year.
“It is clear that there is plenty of confusion still around Brexit,” said Jason Simpson, a strategist at Societe Generale (PA:SOGN) SA in London. “We may be moving to phase two, but criticism that the deal was far from watertight and that things may still fall apart has probably provided a little support. There is no further conventional supply and risk assets are still a bit wobbly.”
The yield on 10-year gilts fell eight basis points, set for the biggest drop since Dec. 1, to 1.20 percent. The move almost erased last week’s increase. The pound fell 0.2 percent to $1.3361 and weakened 0.5 percent to 88.32 pence per euro.
Gilts Bull-Flatten After Friday’s Bear-Steepening, Reflecting Asymmetry
Differences of opinion on Brexit talks could compromise the ability to move talks on to trade, which would likely benefit gilts on haven demand, said John Wraith, the London-based head of U.K. rates strategy at UBS Group AG. Brexit Secretary David Davis told BBC TV on Sunday that the deal agreed with the EU Friday “was much more a statement of intent than it was a legally enforceable thing.” However, he told LBC Radio on Monday that the deal is “legally enforceable under the withdrawal agreement.”
Supply of gilts should come down by approximately 4.4 billion pounds ($5.9 billion) in the fiscal year 2018-19 from the current year, Morgan Stanley (NYSE:MS) said in a note this month.
(Updates Brexit developments, prices in fourth paragraph.)