Eoin Treacy's view -
Gilts outperformed German bonds as money markets ramped up bets the Bank of England will ease monetary policy.
The yield premium of benchmark U.K. government bonds over their German peers fell to the narrowest since December 2018 after BOE policy maker Silvana Tenreyro said Friday she may support an interest-rate cut if the economy doesn’t strengthen. This came a day after Governor Mark Carney said economic growth in the U.K. had slowed below potential and that the Monetary Policy Committee had discussed the merits of near-term stimulus.
While the BOE was likely to keep rates on hold “Carney’s comments highlight the risk that the MPC may cut if data is weak or take its time before hiking,” said Morgan Stanley analysts including Jacob Nell, in a client note dated Jan. 10.
Money markets on Friday were pricing in a 24% probability of a quarter-point interest-rate cut from the U.K. central bank as early as the upcoming Jan. 30 meeting. That compared to a negligible chance on Wednesday before the policy makers’ comments. The probability of a rate cut by May 2020 doubled to 56% in the same period.
The Bank of England’s statements to the effect that they are willing to cut rates if necessary was a clear signal to traders they are worried about the speed with which the Pound has rallied since the General Election.
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