(Bloomberg) -- UK bonds rallied sharply and investors braced for further interest-rate cuts from the Bank of England this year after it eased monetary policy for the first time since 2020.
The yield on 10-year UK government bonds fell as much as 11 basis points to 3.86%, while two-year rates slid 15 basis points, the largest drop this year. The Monetary Policy Committee voted 5-4 to lower the key rate to 5%, though gave no specific guidance on where interest rates may settle, nor the speed of cuts needed to get there.
That didn’t deter money market traders from pricing around 40 basis points of additional cuts by December — which means odds now favor two more quarter-point reductions. The moves were compounded by US data that suggested the labor market is cooling, potentially triggered a global economic slowdown.
“After today’s decision, and in anticipation of further cuts in an easing cycle, we expect bond yields to drift towards the lower end of their range,” said Van Luu, the global head of solutions strategy for fixed income and currencies at Russell Investments.
“Sterling has been strong this year, but the rate cut has put some pressure on the pound today. Investors have built up significant long positions in sterling, so it has been vulnerable to a short-term correction,” he added. The UK currency held losses Thursday, trading down around 0.4% at $1.28.
Now the BOE has cut rates for the first time since the start of the pandemic, investor focus will turn to the prospects of a meaningful monetary easing cycle, and whether the BOE’s efforts will diverge from other major central banks. The European Central Bank has already started lowering its key rate, while US Federal Reserve Chair Jerome Powell said a cut could come as soon as September.
The pound’s slump only dents its recent outperformance, with year-to-date returns beating all other Group-of-10 currencies. That reflects relatively high interest rates, an improving economic outlook and a stable UK government following last month’s election.
The BOE’s outlook “suggests caution to further cuts,” said Neil Jones, a foreign-exchange salesperson to financial institutions at TJM Europe. “This should imply an offered tone to the pound but with limited downside.”
--With assistance from James Hirai.
(Updates prices.)
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