BlackRock Steers Away From U.K. Bond Market on BOE Mixed Signals

  • Economists unanimously forecast BOE rates on hold on Thursday
  • EU referendum another factor in keeping distance from market

The Bank of England’s shifting rhetoric this year has left BlackRock Inc. wary of the U.K.’s government-bond market.

The U.K.’s central bank has repeatedly altered its view on the factors determining when interest rates may rise and so has made positioning challenging, according to Scott Thiel, deputy chief investment officer for fundamental fixed income at the world’s largest asset manager. The BOE will announce its latest policy decision on Thursday with all economists surveyed by Bloomberg forecasting no change to the record-low 0.5 percent bank rate. Thiel said that at the beginning of 2015 he had expected the BOE to raise rates at some point in the year, something that clearly won’t be happening.

The U.K. market is “very difficult to position very heavily in,” Thiel said at a briefing in London on Wednesday. “The Bank of England has continuously changed the goal posts for us as investors to try and decide how monetary policy is being decided and what the ultimate point of liftoff for the U.K. will be.”

Traders are betting officials will keep the benchmark rate on hold through 2016, forward contracts based on the sterling overnight index average, or Sonia, suggest. BOE Governor Mark Carney first said in July that the timing of when to tighten will become clearer around the turn of the year. Since then officials cut growth and inflation forecasts while highlighting the risks to the U.K. economy from the strength of the pound and a slowdown in international growth from emerging markets.

Another factor holding the asset manager back is the planned referendum on Britain’s membership to the European Union. Prime Minister David Cameron has said the vote will happen by the end of 2017, and opinion polls have suggested no side has a clear lead.

The referendum “in the heat of the moment is incredibly important for the direction of U.K. rates, currency,” Thiel said. “We’re not really taking tremendous amounts of risk in the U.K. fixed-income market.”

Gilts have returned 2.1 percent this year, according to Bloomberg’s World Bond Indexes. By comparison U.S. Treasuries have gained 1 percent and euro-area securities 2.2 percent.

The U.K.’s 10-year yield rose six basis points, or 0.06 percentage point, to 1.89 percent as of 4:17 p.m. London time. The 2 percent bond due in September 2025 fell 0.565, or 5.65 pounds per 1,000-pound ($1,517) face amount to 101.02.

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