(Bloomberg) -- Bonds may not be as safe as they look after a Bank of England rate hike that's been deemed as “one and done.”
With much of the market buying gilts on the Bank of England's slow approach, money managers at Pimco and Allianz Global Investors GmbH are taking contrarian bets. Policy makers voted 7-2 in favor of the first rate increase in a decade, doubling the key rate to 0.5 percent, but sounded reticent in communication accompanying the change.
Traders pushed back bets for the next rate increase to November 2018 from August because of what the BOE didn't say. Absent was a clause that had appeared in previous statements saying more hikes could be needed than financial markets expect. The omission, together with a cautious tone on Brexit, sent the pound to its lowest level in almost a month against the dollar and lifted bonds.
“The most likely outcome is a relatively smooth Brexit, in which case the risks look to be skewed to a slightly faster path of interest rate hikes than those currently implied by the market,” said Mike Amey, a managing director at Pacific Investment Management Co. in London. “This suggests that gilts remain relatively rich, with better value available in overseas government bond markets such as the U.S.”
Allianz GI money manager Mike Riddell said he's paring exposure to gilts after the rally saw benchmark yields slump by the most in three months. BOE Governor Mark Carney said after Thursday's decision that the central bank was likely to raise interest rates twice over the next three years, which is more than the market is currently pricing.
The yield on ten-year gilts fell two basis points to 1.25 percent as of 9:55 a.m. in London, its lowest in seven weeks, following an eight-basis point drop on Thursday. The pound was little changed on Friday at $1.3065 after earlier touching $1.3040, a four-week low.
“The market reaction of course tells you that investors were overall positioned for a hawkish statement, however the reaction alone is a bit nonsensical,” Riddell said. “The market has wiped out almost half of one of those hikes. So clearly the market pricing of the path of future interest rates is once again below the BOE's own estimate.”
--With assistance from Scott Hamilton
To contact the reporters on this story: John Ainger in London at jainger@bloomberg.net, Anooja Debnath in London at adebnath@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Cecile Gutscher, Robert Brand
©2017 Bloomberg L.P.
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