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British Bonds Surge as Bank of England Holds Interest Rates Steady

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British Bonds Surge After Bank of England Keeps Interest Rates Steady

UK bonds experienced their best day in over a month on Thursday, while stocks also saw gains, following the Bank of England’s decision to hold interest rates steady for a second consecutive meeting. The rise in bonds and stocks was already underway after the US Federal Reserve’s decision to keep interest rates unchanged the previous day. Investors are now feeling confident that the next move in borrowing costs will be a cut.

Yields on benchmark 10-year UK bonds, known as Gilts, dropped significantly to 4.318%, marking a 12 basis point (bps) decline for the day at 4.381%, and a 2 bps decrease from before the Bank of England’s decision. This dramatic fall puts the yield on track to experience its biggest one-day decline since mid-September. Declining yields indicate rising prices in bonds, and vice versa.

The Bank of England left borrowing costs at 5.25% and released forecasts that projected the British economy to teeter on the edge of a recession and stagnate in the coming years.

Stocks were boosted by the global fall in bond yields, with the UK’s FTSE 100 stock index increasing by 1.54%. The index was already up by 1.2% prior to the Bank of England’s decision. Smaller companies, which are more sensitive to changes in borrowing rates, outperformed their larger counterparts, with the UK’s FTSE 250 index surging by 3.15%.

Michael Field, Europe market strategist at Morningstar, stated, “The news over the last day, from both the Fed and the BoE, indicates that we are done with rate increases, and that decreases are the next item on the agenda. With this in mind, bond markets once again adjusted.” However, Field also noted that although the rally in bonds on Thursday helped to reverse the sharp sell-off that had pushed yields to their highest level in decades, it did not fully negate the previous decline.

The Bank of England’s Monetary Policy Committee (MPC) voted 6-3 in line with expectations to keep the Bank Rate unchanged, according to a Reuters poll.

Following the decision, the value of the pound initially rose but later relinquished some of its gains, ending up 0.24% higher at $1.2179. The fall in US yields had weighed on the dollar, which had been trading approximately 0.35% higher before the Bank of England’s announcement.

James Lynch, fixed income investment manager at Aegon Asset Management, remarked, “The momentum in the economy and future indicators point to lower activity. The question should now be when will the BoE cut.”

Traders in derivatives markets on Thursday briefly priced in a Bank of England rate cut in August 2024, but subsequently reduced their bet. According to LSEG data, they anticipate two rate cuts by the end of next year.

Ed Hutchings, head of rates at Aviva Investors, stated, “Medium-term… with weaker growth and past hikes yet to feed through, we are close to all but done with interest rate hikes, which is ultimately supportive for Gilts.”

The yield on Britain’s 2-year gilt traded 7 bps lower at 4.723%, reaching its lowest level since June 2023 at 4.655% after the Bank of England’s announcement.

Over the past two months, global bond yields have risen due to strong US economic data. Last week, the 10-year Treasury yield exceeded 5% for the first time since 2007. However, that yield fell by 12 bps on Thursday, standing at 4.657%.

Prior to the US central bank’s policy decision on Wednesday, the US Treasury announced that it would slow down the pace of increases in its longer-term debt auctions in the next three months.

Further supporting the decline in bond yields on Thursday was the release of data showing that US weekly jobless claims increased moderately last week.

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

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