(Bloomberg) -- UK government debt rallied, driving the two-year yield below 4% for the first time this year, as investors bet the Bank of England will soon start easing monetary policy.
The rate fell as much as eight basis points to 3.99% ahead of closely-watched UK inflation and jobs reports this week that will potentially influence the BOE’s stance. Data earlier Tuesday showed grocery-price increases decelerated to the lowest pace in almost three years.
Calls for rate cuts are growing louder given headline consumer-price growth has already slowed to policymakers’ 2% target, attracting investors back to UK bonds. The annual rate will ease further to 1.9% in June, according to the median estimate in a Bloomberg survey of economists.
Money markets are pricing two quarter-point cuts from the BOE this year, with the chance of a first reduction next month at just below 50%.
“Dovish data this week would really help in providing the cover to cut in August,” said a Citigroup Inc. team including Jamie Searle, who recommend a swaps position that would benefit if the central bank eases policy next month.
Earlier this month, Mark Dowding, chief investment officer at RBC BlueBay Asset Management, one of the UK bond market’s most vocal bears, scrapped a bet against gilts, saying Labour’s big election win and an upcoming interest-rate cut will give them a short-term boost.
Still, persistent price pressures in the services sector, a tight labor market and an economy that is looking more robust mean the BOE may cut rates less aggressively than the Federal Reserve and the European Central Bank this year.
That has buoyed the pound, the only currency in the Group-of-10 that has bucked the dollar’s advance since December. Sterling slipped to $1.2950 on Tuesday, just off a one-year high, as the greenback rallied on stronger than expected US retail sales data.
--With assistance from Alice Gledhill.
(Updates with context, CPI survey in third paragraph.)
©2024 Bloomberg L.P.
