London Markets: Yield on U.K. inflation-linked bonds reaches more than decade high as natural-gas futures surge

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The yield on the 10-year breakeven in the U.K. rose to the highest level since 2008 as energy costs spiral higher.

The 10-year breakeven yield rose as high as 4.08%, the highest since 2008, according to data from Bloomberg News. That came on a day when the U.K. natural-gas contract

surged as much as 38% before turning lower.

The broader story in natural gas is that Asian demand due to stretched coal supplies, a lack of Russian output and disappointing U.K. wind power have combined to send prices higher. Russian President Vladimir Putin on Wednesday pledged to increase gas output to Europe, even through Ukraine which he’s been reluctant to do.

The U.K. bonds are tied to a measure of inflation, called the retail price index, that’s typically higher than the consumer price index used by most inflation-linked bonds elsewhere in the world.

“Notwithstanding a fall from earlier extreme gains this morning, the extraordinary moves in natural gas prices have continued to drive global inflation breakevens to multi-year highs. The stand out feature of the last 24 hours has been that index-linked bonds are now implying UK RPI inflation will be 7% in April 2022. This is the month the energy regulator Ofgem updates its price cap for utility bills,” said Jim Reid, strategist at Deutsche Bank.

The inflation woes weighed on the FTSE 100
which sunk 1.4% to 6,975.54, retreating once more below the 7,000 level.

There were a few notable standouts. Tesco

rallied 6% as the U.K. supermarket leader reported stronger-than-forecast half-year sales, lifted its fiscal year profit forecast and unveiled a £500 million stock buyback.

HSBC Holdings

added 3% as UBS upgraded the bank to buy from neutral. saying its 50% underperformance to European banks since the middle of 2019 makes it cheap if rates don’t rise and very cheap if they do. “This is a stock with good growth potential in Asia, available at attractive near term valuation multiples, in our view,” said the UBS analysts.

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