Traders are once again entertaining the prospect of an outsized interest-rate hike in the UK, setting the nation’s battered bond market up for further losses.
(Bloomberg) — Traders are once again entertaining the prospect of an outsized interest-rate hike in the UK, setting the nation’s battered bond market up for further losses.
Analysts at firms including Saxo Bank A/S and TD Securities said policymakers could boost the size of next month’s interest-rate increase to 50 basis points after data showed wages grew at the fastest pace on record.
Money markets now imply almost one-in-three odds of a half-point hike in September. Before the data, not even a quarter-point increase was fully priced.
The UK bond market is the worst performing in the developed world this year, with 10-year yields up 94 basis points. That’s almost three times as much as similar-dated US Treasuries and eight times the move in German bonds.
A half-point hike is now a “possibility,” said Althea Spinozzi, senior fixed-income strategist at Saxo Bank in a Bloomberg TV interview. “That’s going to be extremely bad for the bond market, because at this point bond investors will need to price more premium in yields.”
The BOE slowed the pace of tightening to a quarter-point clip this month after delivering a half-point increase in June.
Accelerating the pace of tightening would widen the gulf between the BOE’s policy and Federal Reserve and European Central Bank, both of which are drawing close to the end of their rate-hike cycle.
Swaps tied to central bank meeting dates imply 84 basis points of additional hikes in the UK, compared with 24 basis points for the euro zone and around half of that for the US.
Read more: Record UK Wage Growth Keeps Bank of England on Hike Path
The BOE’s next move largely depends on UK inflation data due Wednesday as well as a nation-wide print due a day before officials meet to set policy on Sep. 21. Economists expect UK inflation will fall again when July’s data is released.
The Consumer Prices Index is forecast to slide to 6.7%, the lowest since the start of last year but still more than triple the BOE’s 2% target.
While “flipping back and forth between 25bps and 50bps is unlikely,” according to Derek Halpenny, head of global markets research for EMEA at MUFG Bank, he said yields will push higher ahead of tomorrow’s inflation data.
UK bonds fell Tuesday with the policy-sensitive two-year yield rising as much as 12 basis points to 5.20%, the highest in four weeks. German bonds were also dragged down, with the 10-year yield rising to the highest since March.
“The MPC will now almost surely hike by at least 25bps in September,” said James Rossiter, head of global macro strategy at TD Securities. “And we should absolutely not rule out a 50bps hike should the CPI data or indeed next month’s wage data surprise further to the upside.”
–With assistance from Anchalee Worrachate and Greg Ritchie.
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