(Bloomberg) -- Allianz Global Investors, one of Europe’s biggest asset managers, is buying UK government bonds on the view the Bank of England may step up the pace of interest-rate cuts as the economy loses momentum.
While the central bank is likely to keep rates unchanged next week, the market could soon price in more aggressive easing, said Julian Le Beron, the chief investment officer for core fixed income at Allianz GI.
“There’s scope for the probability of hard landing to increase over the coming months, which will enable central banks and the BOE to front load rate cuts,” Le Beron said.
Inflation in the UK has proved stickier than expected, tempering bets on aggressive easing by the BOE this year. But that narrative appears to be changing amid signs growth is weakening. Recent data showed UK pay growth cooled to a two-year low and the economy stalled for a second month.
The market is currency pricing around 100 basis points of rate cuts by end of the first quarter next year. Those expectations seem unrealistic for Le Baron.
“Assets are too much priced for a soft landing and too little for a hard landing,” he said. “The fear is that the BOE could wait too long to adjust its restrictive policy stance.”
Allianz GI recently started buying 10-year gilts against German bonds at a yield spread of around 175 basis points, which it expects will tighten to around 125 basis points over the medium term. The firm had been running a long gilt position in the second quarter, but took profit early in August when bond volatility spiked.
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