(Bloomberg) -- Some of Europe's biggest fund managers are set for a face-off on how best to trade the U.K.'s first potential interest-rate increase in a decade.
Allianz Global Investors GmBH is looking to sell the pound into a rally, betting the Bank of England won't signal further policy tightening given lingering economic and political risks. Fidelity International has a similar view, while Aberdeen Standard Investments sees scope for more than one increase and prefers to maintain a long position in sterling against the euro.
The U.K. central bank will raise its key rate by 25 basis points from a record low to 0.50 percent Thursday in the first increase since 2007, according to 52 of 60 analysts in a Bloomberg survey, while the remaining eight see no change. The BOE will release its latest outlook for the nation's growth and the quarterly inflation report on the same day.
“Ultimately, the central bank is going to be constrained by what is still a weak economy, weak wage growth and in my eyes a worsening political situation,” said Kacper Brzezniak, a portfolio manager in London at Allianz, which manages 498 billion euros ($580 billion) of assets. “If, from the BOE, you got a large sterling rally or a big sell-off in gilts we would look to fade both of them” should the market reaction be “unwarranted,” he said.
Brzezniak said his decision on how to trade the pound and gilts will depend on the monetary policy committee's vote split, the central bank's statement, the inflation report, Governor Mark Carney's press conference and whether there is a mismatch between the BOE's message and the market's reaction.
Pound Bears Smell Opportunity in One-And-Done BOE Rate Hike
Yields on U.K. 10-year government bonds were at 1.34 percent as of 11:39 a.m. in London on Wednesday. They climbed to 1.44 percent on Oct. 25, the highest in almost nine months, after the U.K. economy grew more than forecast in the third quarter and cemented rate-hike expectations. Sterling strengthened against the euro for a second month in October and was at 87.47 pence.
‘Somewhat Cautious'
Fidelity is currently “somewhat cautious on gilts” and “not too far” from levels where the fund would consider going neutral, according to Andrea Iannelli, fixed-income investment director. Current market circumstances don't justify an increase in the 10-year yield beyond 1.5 percent, he said.
James Athey, a senior investment manager in London at Aberdeen Standard, expects the BOE to raise borrowing costs again as an increase on Thursday would merely reverse last year's emergency cut, which he terms a “catastrophic mistake,” following the Brexit referendum.
The monetary authority “could get another couple of hikes in without doing any real damage to the economy,” said Athey, who currently doesn't have an active position in gilts after being short recently. “Getting rates to 1 percent would help to re-balance.”
That view is seconded by Paul Rayner, head of government bonds at Royal London Asset Management, who sees 10-year yields climbing toward 1.60 percent by year-end. After tightening policy on Thursday, the central bank “will keep open the possibility of a hike next year and probably one the year afterwards,” he said.
If the market moves to price in two rate increases next year, that could boost 10-year gilt yields to 1.45 percent, a move Allianz would look to bet “fairly aggressively” against, according to Brzezniak.
--With assistance from John Ainger
To contact the reporter on this story: Anooja Debnath in London at adebnath@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma
©2017 Bloomberg L.P.
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