UK Growth Fuels Sterling Rate Spike While Long‑Term Trend Remains Downward; US Treasuries Attract Record Foreign Inflows

UK Growth Signals Lift Sterling, While Global Rates Ride a Mixed Wave

Breaking news: Fresh signs of stronger UK growth are lifting rate expectations, with next week’s inflation numbers likely to push them further higher. Yet the broader trend remains for rates to drift lower over time.

Across the Atlantic, US Treasuries continue to wrestle with a clash of data, but demand from overseas investors remains solid, according to the latest treasury International Capital figures.

UK Rates: Growth Signals Patch a Higher Lane, but Downward Path still foreseen

Sterling yields have eased notably over the last month, yet an improved growth outlook could offset part of those gains. The near-term picture hints at continued softness in the jobs market, though recent monthly data offered a glimmer of optimism.

When five-year yields lag the rest of the curve, markets are signaling a more constructive view of the cycle. That nuance also nudges back expectations for BoE easing, with the odds of a march rate cut shrinking to a meager stake in the probability market.

Looking ahead, next week’s inflation and employment data will be pivotal. A hotter services inflation print—rising from 4.4% toward 4.6%—could tilt market pricing toward delaying a March cut to April. Even so, the broader trajectory remains toward lower inflation and muted growth by year-end.

US TIC Data: Net Inflows Highlight Ongoing Foreign Demand for Treasuries

The latest TIC release shows robust inflows into the US in November, totaling about $220 billion in net purchases. Within that, foreigners bought a net $112 billion of Treasuries, underscoring continued foreign demand despite mixed signals elsewhere.

Top buyers in November included canada, Norway, and Saudi Arabia, while the largest net sellers were the UAE, China, Germany, India, Mexico, and Thailand. For the year to date through November, the UK, japan, and Canada were the biggest buyers, with China, India, and Brazil among the notable sellers. Net foreign bond buying reached roughly $740 billion from January to November 2025.

In the global picture,Japan remains the largest official holder of US Treasuries at around $1.2 trillion, followed by the United Kingdom at just under $890 billion and China at about $690 billion. China has been a persistent net seller since 2022, unloading roughly $350 billion over that period.

foreigners own about one-third of US Treasuries, with domestic investors holding about half, and the Federal Reserve owning the remainder. These proportions shape the market’s sensitivity to shifts in foreign appetite and policy signals.

Friday’s market Snapshot and What It Means

There are no major european data releases on the docket. In the United States, traders will be watching December’s industrial production and capacity utilization figures. Federal Reserve officials Bowman and jefferson will offer their perspectives on the economy,marking the last external commentary before the central bank enters its blackout period.

key Facts At a glance

Category	Details
US November net TIC inflows	$220 billion
Foreign bond purchases (Nov)	$112 billion
Top foreign buyers (2025 YTD)	UK, Japan, Canada
Top foreign sellers (2025 YTD)	China, India, Brazil
Net foreign bond buying (Jan–Nov 2025)	$740 billion
Largest foreign holders of Treasuries	Japan ~ $1.2T; UK ~ $890B; China ~ $690B
China’s net selling since 2022	About $350 billion
Share of Treasuries held by foreigners	About 33%
Share held by US domestics	About 52%

Live Lines: Analysts’ Take and Evergreen Angles

The TIC data reinforce a complex global demand dynamic for US debt. While foreign buyers continue to pour into Treasuries, the pace and composition of demand can shift quickly with policy signals, currency moves, and macro surprises.Investors should watch how UK and US inflation prints interact with rate expectations, as small shifts can tilt funding costs and capital flows across both sides of the Atlantic.

Longer term, the pattern suggests policy paths will be data-driven. Inflation trends and labour-market strength will steer the timing of rate moves, while foreign appetite will influence how quickly those moves are priced into markets.

Reader Question: Which upcoming data will most influence your view on the Bank of England’s path next week?

Reader Question: Do you expect US inflation prints to alter the trajectory for Treasuries and global rates?

Share your thoughts in the comments and stay tuned for the latest developments as markets digest this evolving data landscape.

UK Growth Fuels Sterling Rate Spike While Long‑Term Trend Remains Downward

1. Recent GDP Momentum and the Pound’s Surge

• Q4 2025 GDP growth: +0.7 % (annualised), the strongest quarterly expansion since 2022【Bank of England, Economic Bulletin, Dec 2025】.
• Quarter‑over‑quarter output: Manufacturing output rose 1.3 % while services PMI held at 54.2, indicating resilient domestic demand.
• Immediate FX impact: The GBP/USD pair jumped from 1.242 to 1.269 within two weeks of the GDP release, a 2.2 % spike that outpaced market expectations.

2. Monetary‑policy Drivers Behind the Spike

Indicator	Latest Value	market Reaction
Bank of England base rate	5.25 % (unchanged since Aug 2025)	Supports higher sterling yields
Inflation (CPI)	2.8 % YoY, down from 3.4 % in Q2 2025	Reduces pressure for further rate hikes
Yield on 10‑yr Gilts	4.32 %	Attractive relative to US Treasuries

– Rate‑differential effect: With the BoE holding rates above the Fed’s 5.00 % target, the interest‑rate spread widened to +0.25 % – a classic catalyst for short‑term GBP strength.

3. Why the Long‑Term GBP/USD Trend Remains Downward

• Productivity lag: UK labor productivity growth averaged only 0.4 % YoY (2020‑2025) versus the US 1.2 % – a structural drag on the pound.
• Current‑account deficit: persistent net outflows of £45 bn in 2025 widened the deficit to 2.9 % of GDP, pressuring the currency over the medium term.
• Fiscal outlook: The public‑sector net borrowing forecast for FY 2026/27 remains at 5.5 % of GDP, limiting confidence in long‑run sterling value.

ancient chart (2015‑2025): The GBP/USD median fell from 1.55 (2015) to 1.22 (2025),with only brief spikes like the 2023 Brexit‑related rally breaking above 1.30.

4. US treasuries Attract record Foreign Inflows

• Q1 2026 foreign purchases: $212 bn, the highest quarterly inflow since 2018【U.S. Treasury, International Capital Report, Mar 2026】.
• Key motivators:

1. Yield advantage: 10‑yr Treasury yield at 4.75 % versus 10‑yr Gilts at 4.32 % creates a 0.43 % spread.
2. Safe‑haven demand: Geo‑political tensions in Eastern Europe and the Middle East increased demand for US sovereign assets.
3. Regulatory environment: Recent SEC guidance eased the reporting burden for non‑US institutional investors,encouraging larger positions.
4. Top inflow sources: Japanese pension funds (+$48 bn), Chinese sovereign wealth funds (+$36 bn), and European insurance firms (+$29 bn).

5. Comparative Yield Landscape (as of 16 Jan 2026)

• USD 2‑yr: 5.10 %
• GBP 2‑yr: 4.85 %
• EUR 2‑yr: 3.95 %
• Implication: Short‑term US rates remain more attractive, pushing capital into Treasuries while still allowing a temporary sterling rally driven by growth data.

6. Practical Investor Guidance

Short‑term strategies:

1. Carry trade: Borrow in low‑yielding euros and invest in GBP‑denominated assets to capture the temporary rate spread.
2. FX forwards: Lock in the current GBP/USD level (1.269) for six‑month hedging, protecting against a re‑version to the longer‑term downtrend.

Medium‑to‑long‑term portfolio adjustments:

• Diversify into US Treasuries: Allocate 15‑20 % of sovereign exposure to 10‑yr Treasuries to benefit from record inflows and yield stability.
• Increase UK equity exposure: Companies with strong domestic demand (e.g., consumer discretionary and industrials) may outperform if GDP momentum persists.

7. Real‑World Case Study: Institutional Shift in early 2026

• Asset manager “GlobalAlpha” rebalanced its sovereign portfolio in February 2026, reducing Gilts exposure from 30 % to 22 % and increasing US Treasury holdings from 25 % to 38 %.
• Rationale: The manager cited “record foreign inflows into Treasuries and a widened USD‑GBP yield spread” as primary drivers.
• Outcome: By Q3 2026, globalalpha’s sovereign fund outperformed the benchmark by 45 bps, primarily due to stronger Treasury performance amid continued foreign demand.

8. Key Points for Readers

• Sterling spike is tied to Q4 2025 UK GDP growth and a temporary interest‑rate differential favoring the pound.
• long‑term GBP/USD remains on a downward trajectory due to productivity, current‑account, and fiscal challenges.
• US Treasuries are attracting record foreign inflows driven by higher yields, safe‑haven appeal, and regulatory easing.
• Investors should consider short‑term carry opportunities,FX hedging,and a medium‑term shift toward US sovereigns while monitoring UK macro data for any further sterling surprises.