U.K. Bonds Rise as Futures Signal Near Certainty of BOE Rate Cut

  • Benchmark 10-year gilt yields fall to lowest since July 11
  • Futures signal 100% chance of BOE rate cut at Aug. 4 meeting

U.K. 10-year government bonds posted their biggest gain in a month as traders fully priced in the chances of the Bank of England cutting interest rates next week.

The advance pushed benchmark gilt yields to their lowest in two weeks. While a report released Wednesday showed stronger-than-forecast U.K. growth data, it was overlooked by investors as it mainly covered the period before Britain voted to leave the European Union.

Wagers that the central bank will lower rates were boosted after BOE policy maker Martin Weale, a one-time hawk, said this week that he now favored immediate stimulus as purchasing managers’ indexes released July 22 were a lot worse than he had thought.

Futures signal a 100 percent chance of the BOE cutting rates from the current record low of 0.5 percent, a level its been at since March 2009, when they announce their latest policy decision on Aug. 4. That compares with odds of about 15 percent on June 23, the day of Britain’s referendum on its EU membership.

‘Dovish Stance’

“We have had suggestions that the BOE may have a dovish stance when they meet next week,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “Weale this week, who was quite hawkish previously, now seems to be quite dovish and you’ve had the flash PMIs last week” which have also boosted expectations of a rate cut, he said.

The benchmark 10-year gilt yield dropped eight basis points, or 0.08 percentage point, to 0.74 percent as of 4:19 p.m. London time, having touched 0.73 percent earlier, the lowest since July 11. The eight basis-point decline is the most since June 27. The 2 percent bond due in September 2025 rose 0.775, or 7.75 pounds per 1,000-pound ($1,311) face amount, to 111.145. The yield on the nation’s two-year gilt fell four basis points to 0.13 percent.

Gilts returned 2.7 percent in the past month, compared with a 0.3 percent gain from Treasuries, according to Bloomberg World Bond Indexes.

BOE officials voted 8-1 to keep the main rate on hold last month. They also maintained the asset-purchase target at 375 billion pounds, a level held since July 2012.

Wednesday’s move in gilts was caused by “people starting to put on trades ahead of the BOE next week and the expectations of at least 25 basis points of cuts and there is some suggestion” of further quantitative easing, Cantor’s Callan said.

Pound Pressured

The pound fell to a 31-year low against the dollar earlier in July in the aftermath of the Brexit vote, which clouded the U.K.’s economic outlook and spurred bets on BOE policy action.

Sterling weakened 0.1 percent to 83.78 pence per euro. The pound was little changed at $1.3123, having earlier dropped as much as 0.4 percent.

“The fact that the pound fell tells you that the market is seeing right through this,” said Gavin Friend, a strategist at National Australia Bank Ltd. in London. “It sees it as a historical number with expectations of weakness to come. That’s quite indicative of the way the market is now looking through anything that’s good.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE