The arc in the U.K. Gilt yield pendulum at its highest point

On this Monthly chart, when Gilts yield were Overbought, the Pound Sterling was strong.

Today, Gilts are Overbought BUT Sterling is falling to new lows.

Who is wrong?

The FX market or the bond market?

Whilst FX is the most liquid market, the bond market is more believable.

However, have British economic woes decoupled where this traditional symbiotic relationship of a weak currency and higher bond yields is now resembling what we see in emerging market economies?

Albeit this is a dramatically painted scenario, I don’t think this is the case.

The long term strategy is to Buy British Pounds (GBP).

If you are in the business of needing to own debt, then buying U.K. 10 year Gilts at this juncture (the highest yield seen in the past 12 years) is worth considering.

Inversely, I don’t know why you would initiate a new short at 4.10%?

I haven’t seen any of the ’talking heads’ on business TV suggest shorting Gilts at 0.15% but now they are concurring that it goes higher.

Keep in mind that many are simply ‘reporting’ what is happening today but few seldom make a call identifying the extreme end of the pendulum.

Time will tell but I can’t help think many are doing the wrong thing, at the wrong time.

September 26, 2022

by Rob Zdravevski

rob@karriasset.com.au