Mapping the Market: UK gilt yields may be poised for a storm after the calm

UK fiscal worries have put 10-year gilt ​yields in the spotlight this year, but ​the relative serenity in that market in ‌recent sessions ​may just be the calm before the next storm — potentially in the autumn if not sooner — if key levels watched by technical analysts come under ‌threat. Click here for a more detailed chart.

Ten-year gilt yields surged this year after the U.S.-Iran war sent oil prices higher, stoking inflation fears. Because rising yields mean higher borrowing costs for the government, the move quickly put the UK's fiscal ‌position back under the microscope — a particularly sensitive issue given memories of the market chaos triggered by the 2022 "mini-budget" ‌under former Prime Minister Liz Truss. From a low of 4.23% just before the war began, yields climbed to about 5.20% in May, their highest since mid-2008, according to data supplied by LSEG. Technical analysts pay close attention to such prior highs and lows, since they often ⁠act as levels ​where a market move ⁠can stall — or accelerate.

A break above 5.20% would open the door to the next target, the relatively close 2008 high of 5.28%. Beyond ⁠that lie two older peaks, 5.62% from 2007 and 5.88% from 1999. What might trigger a move to these levels is ​unclear, but it would likely reflect a loss of confidence in UK fiscal policy. One potential catalyst looming ⁠as a major fiscal event is the autumn budget in October. And, if yields surpass those highs, technically this could set up a stair-step climb ⁠toward ​levels above 7%, 8%, even 9% last seen in 1994.

Conversely, a drop below the February low of 4.23% would suggest the market's fiscal alarm has eased. What the chart shows:

(Daily markets commentary from Reuters analysts on the signals financial charts are sending — and what they might mean.) (Paul Spirgel is ‌a Reuters ‌market analyst. The views expressed are his own. Editing by Burton ​Frierson and Lisa Shumaker)