U.K. yields’ march to record lows will gather momentum in the coming weeks as traders’ conviction in
negative BOE rates grows.
It’s happening today, with short-sterling contracts in 2022 printing 100 for the first time. This implied a 3-mo. GBP Libor fixing at 0%, with the March 2022 contract implying an unprecedented fix of -0.01%. Moreover, MPC-dated OIS rates currently have a cut to zero fully priced by the June 2021 meeting and 15bps of reductions priced by September 2021, which would take the rate negative.
In the gilt curve, 2-yr and 5-yr yields are already comfortably below zero and a negative yield in the 10-yr maturity is only a matter of time. The underwhelming fiscal package unveiled this week, with the furlough scheme unlikely to be extended, has spurred investors to bet the BOE will pick up the bulk of the stimulus slack. With that, new superlatives await for the depth of U.K. yields.
The Bank of England is facing the same quandary as many other central banks. Do they push rates into negative territory or do they greatly increase monetary stimulus to offset the inability to cut rates? The first hamstrings the banking sector, because they will see margins on loans disappear or even go negative. The second risks debasing the currency and fueling asset price inflation.Click HERE to subscribe to Fuller Treacy Money Back to top