UK government bonds are bucking a global debt rout as investors pile in on bets the Bank of England is near the end of its monetary policy tightening cycle.
Ten-year government securities are poised for a fifth straight week of gains, the longest stretch since 2021. The moves are in stark contrast to a selloff spreading across bond markets in the US and Germany, and underscore the increasing risk of recession in the British economy.
That’s led money markets to slash bets on further BOE interest-rate hikes, with odds favoring just one more to 5.5 per cent by March, compared to a peak above 6 per cent seen just a few weeks ago. The thesis was reinforced by the BOE unexpectedly keeping rates unchanged Thursday after 14 successive increases.
“Markets are positioning for the possibility that the BOE’s hiking cycle is over,” says Evelyne Gomez-Liechti, rates strategist at Mizuho International Plc, who sees gilt yields falling further from the current 4.27 per cent over 12 months. Citigroup Inc.’s Jamie Searle sees a drop below 4 per cent by year-end.
Foreign investors have also returned to UK bonds, with inflows in the four months to July, the longest buying streak since 2021. It’s a turnaround from the heavy outflows seen since Liz Truss’s unfunded tax cut plans in September.
The darkening UK economic outlook is a key factor in the rationale for holding the country’s debt, said Jamie Niven, a senior fund manager at Candriam. He anticipates further BOE rate cuts to be priced in for the second half of 2024 if a disinflation trend continues.
“We continue to like UK rates over global peers given the structural challenges present in the UK economy, with the market underestimating the current level of restrictiveness,” said Niven.