Bets Boosted for Bank of England Hike Signal as Gilt Gloom Poised to Deepen

(Bloomberg) -- U.K. government bonds had their worst month in over a year in April and May isn't looking much better either.

Gilts slid last month as fears of a no-deal Brexit faded, tempering demand for the safety of government debt, after Britain won an extension to the deadline for its departure from the European Union. Bonds look set to extend losses amid expectations that improving U.K. economic data may now wield a stronger influence on the Bank of England's policy, boosting the odds of a rate hike.

JPMorgan Chase & Co., Citigroup Inc. and Toronto Dominion Bank are among banks that see the possibility of a hawkish signal from the BOE as early as at its policy announcement on Thursday. U.K. economic growth beat estimates while the unemployment rate held at the lowest level since 1975, official data released this month showed.

“With Brexit uncertainty being pushed forward, the BOE's focus is likely to shift toward the data,” said Pooja Kumra, European rates strategist at Toronto Dominion. “This shift in stance could be considered bearish for rates.”

Money markets, which reflected expectations for a BOE rate cut as recently as late March, have moved to price in a probability of more than 50 percent that the central bank will raise borrowing costs by mid-2020. This, along with a drop in haven demand, saw 10-year gilt yields jump 18 basis points last month, the most since January 2018.

Dollar-based investors incurred a 1.4 percent loss holding U.K. sovereign bonds last month, the worst performance among European government debt, according to data from Bloomberg Barclays indexes.

• U.K. Yield Gap Over Germany Is Widest Since Brexit Vote: Chart
• U.K. Traders Are Ignoring Risk of a Hawkish BOE, JPMorgan Says

While all the nine members of the central bank's Monetary Policy Committee voted to hold rates at the last meeting on March 21, speculation has risen that this week's gathering could see a hawkish split. Ten-year yields could jump to as high as 1.26 percent in such a case, according to TD's Kumra, from about 1.18 percent on Wednesday.

Strategists at Citigroup see upward pressure building on U.K. short-term rates, expecting the BOE to signal a tightening move as early as this summer.

“A grab-and-go hike is still possible in August,” strategists including Jamie Searle wrote in a research note. “So if a hike is still in play for 2019, a starting signal is needed at next week's meeting.”

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Scott Hamilton

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