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HomeboeBank of England's Gloomy Outlook Causes Sharp Drop in UK Bond Yields

Bank of England’s Gloomy Outlook Causes Sharp Drop in UK Bond Yields

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British bond yields experienced their largest fall in months on Thursday following the Bank of England’s decision to keep interest rates unchanged and provide a pessimistic outlook for the UK economy. The fall in yields was already anticipated after the US Federal Reserve also decided to keep rates on hold and the US Treasury announced plans to issue less longer-term debt than expected. The yield on benchmark 10-year UK bonds, known as Gilts, dropped to 4.318% and ended the day 15 basis points lower at 4.35%, marking a 4 basis point decrease from before the decision. This decline represents the biggest one-day fall in yields since August.

The Bank of England’s decision to maintain borrowing costs at 5.25% was accompanied by forecasts that indicate the British economy is likely to approach a recession and stagnate in the coming years. Following the decision, the value of the pound increased, adding to its earlier rise prompted by the decrease in US yields. It ended the day up 0.51% at $1.2212, after trading approximately 0.35% higher prior to the Bank’s announcement.

The drop in global bond yields had a positive effect on stocks, with the UK’s FTSE 100 stock index closing up 1.54%, compared to a 1.2% increase before the Bank of England’s decision. The Monetary Policy Committee (MPC) voted 6-3 in favor of keeping the Bank Rate unchanged, aligning with expectations from economists. The Bank of England stated that there is a possibility of further tightening, but James Lynch, fixed income investment manager at Aegon Asset Management, believes the chances of another interest rate hike in this cycle are very low. He suggests that the focus should now shift to when the Bank of England will actually cut rates.

Traders in derivatives markets responded to the Bank of England’s decision by fully pricing in an interest rate cut from the central bank in August 2024. Prior to the meeting, there was an 80% chance of a rate cut. Ed Hutchings, head of rates at Aviva Investors, believes that the Bank of England wants to temper market expectations regarding rate cuts, which could have a positive impact on the currency. Looking ahead, he suggests that weaker growth and previous rate hikes will likely result in a reduction in interest rate hikes, which would ultimately support Gilts.

The yield on Britain’s 2-year gilt remained relatively unchanged after the Bank of England’s decision, closing 11 basis points lower at 4.685%. This follows a period of decline that led to the yield reaching its lowest point since June 2023 at 4.655%. Global bond yields have been increasing over the past two months due to strong US economic data, which pushed the 10-year Treasury yield above 5% for the first time since 2007. However, on Thursday, that yield decreased by 12 basis points to 4.657%. The US Treasury’s decision to slow the pace of increases in longer-term debt auctions, combined with data showing a moderate increase in US weekly jobless claims, contributed to the downward trend in bond yields.

More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )

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