JPMorgan Tells Treasuries Traders Not to Forget Bank of England

  • 10-year U.S. yield premium over gilts near most since 2000
  • Wall Street bank predicts 50 basis-point cut in BOE rate

For Treasuries traders focused on Friday’s U.S. jobs data, JPMorgan Chase & Co. has a word of caution: Don’t forget the Bank of England.

Treasuries could rally with gilts Thursday, when the U.K. monetary authority is forecast to expand stimulus to stem the fallout from the country’s decision to leave the European Union, according to the Wall Street firm. U.S. bonds are on track for only their second weekly loss since late May as Japan leads a global debt selloff on speculation policy makers there are running out of easing options.

“Our U.K. team continues to project a larger-than-consensus 50 basis-point ease and 75 billion pounds in gilt purchases,” JPMorgan strategists led by Jay Barry in New York wrote in a client note. The BOE’s benchmark is at a record low of 0.5 percent and its asset purchase program stands at 375 billion pounds ($500 billion). “Any decline in U.K. yields would likely pressure Treasury yields lower as well,” they wrote.

The U.S. 10-year note yield was little changed at 1.55 percent as of 7:47 a.m. in London, data compiled by Bloomberg show. The price of the 1.625 percent security due in May 2026 was 100 23/32.

Treasuries Premium

The yield on 10-year Treasuries offers a premium of 74 basis points to similar-maturity gilts, data compiled by Bloomberg show. The spread reached 79 basis points on July 28, the most since 2000.

All but two of 52 economists in a Bloomberg survey predict the BOE will lower its benchmark later on Thursday, with most predicting a reduction to 0.25 percent. A majority also see additional measures, such as quantitative easing or efforts to aid lending.

The U.S. central bank refrained from raising interest rates in July to weigh the impact of Brexit. Futures contracts show a 39 percent likelihood the Fed will tighten policy by December and slightly better than even odds by June. The chances of an increase this year were at 15 percent on June 24 when the result of the U.K. vote was announced.

U.S. nonfarm payrolls probably increased by 180,000 in July following a surge of 287,000 in June, according to the median estimate of a Bloomberg survey of analysts before the data is released on Friday.

Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or missed forecasts, fell to the lowest since July 13 this week after second-quarter growth disappointed.

“These days, the U.S. figures are not so strong,” said Jun Kato, a senior fund manager in Tokyo at Shinkin Asset Management, which oversees the equivalent of $9.6 billion. “The U.S. 10-year yield will hover around the 1.5 percent to 1.6 percent level for the time being. If nonfarm payrolls are within market expectations, Treasury bonds will not move so much from this point.”

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