UK government bonds fell to levels last seen during the global financial crisis as traders bet the Bank of England may have to raise rates to as high as 6% after data showed wages rose faster than expected in April.
(Bloomberg) — UK government bonds fell to levels last seen during the global financial crisis as traders bet the Bank of England may have to raise rates to as high as 6% after data showed wages rose faster than expected in April.
Money markets fully priced in one-and-a-quarter percentage points of hikes to 5.75% this year, a level last on the cards following the fallout of Liz Truss’s controversial spending plans. They also see a one-in-five chance of an additional quarter-point increase by February. The yield on the two-year notes jumped as much as 20 basis points to 4.84%, the highest since 2008.
The moves coincided with comments by the BOE’s newest rate setter, Megan Greene, who warned of the risks of persistent inflation and the difficulty of getting back to the 2% target.
The UK bond market has been one of the worst-performing across major developed economies this year, with inflation showing no signs of moderating despite more than four percentage points of tightening delivered by the BOE since late 2021. The picture is further muddied because the central bank is selling bonds from its quantitative-easing era holdings and the government is flooding the market with gilts to fund its budget.
“Demand for gilts won’t return meaningfully until investors are confident that inflation is on a sufficiently downward trajectory and we are at — or at least close to — a peak in the Bank Rate,” said Imogen Bachra, head of UK rates strategy at NatWest Markets. “The more that data surprises to the upside, the further into the future that demand gets pushed.”
The repricing Tuesday further inverted the UK yield curve. The 10-year yield is now 43 basis points below the two-year yield, the most since September. That suggests the market is growing concerned over the growth outlook and expects rates to fall well into the future.
Read more: UK Bond Yields Rise as Mann Warns on Persistent Inflation
Still, some investors say the selloff is nearing an end. Mike Riddell, a macro portfolio manager at Allianz Global Investors, said the move is starting to look overdone, while BlackRock Inc. has been dipping back into gilts, lured by some of the highest yields in the developed world.
“Valuations suggest the gilt market is in distress, but there’s isn’t any tangible distress this time,” said Riddell, when comparing UK debt to its peers. “We’ve been bearish UK government bonds relative to other markets much of the last 18 months.”
–With assistance from Alice Gledhill.
(Updates with pricing and context.)
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