Say it quietly, but Britain has resumed its role as a quiet backwater spot in global markets. That is no bad thing. After last autumn’s collapse, UK gilt markets look attractive for the right reasons.
His Majesty’s Treasury will hope so. A record £241bn of gross issuance is expected this year — the second largest amount ever. Gilts will need to catch investors’ attention. With the UK yield curve inverted — one-year yields trade higher than 10-year’s — opportunities should lie at the shorter end.
Bank of England intervention quickly stemmed last year’s fallout in gilt markets jolted by the disastrously received spending plans of the previous Truss government. Interest rate assumptions centred on inflation, rather than sovereign risk, again drive gilt yields. Spreads have normalised.
There has been some bumpiness along the way. Signs of cooling inflation at the start of the year took 10-year yields as low as 3 per cent in February. Stronger than expected economic data then boosted these back up towards 4 per cent. Global banking turmoil brought some flight from risk, sending yields tumbling again as gilts resumed a safe haven status.
Despite a worse than expected UK inflation figure for February of 10.4 per cent, the Bank of England anticipates this will peak soon declining into low single digits later this year. Effects from lower natural gas prices should hit the data soon. Note that Spain’s inflation rate halved in March to 3.1 per cent primarily due to energy price effects.
Futures prices suggest the possibility of one more quarter-point Bank of England rate increase to 4.5 per cent. But even the hawkish BoE Monetary Policy Committee member Catherine Mann has hinted that she has moderated her stance due to inflation and the potential for credit conditions to deteriorate.
That may have begun. Growth in lending to households and businesses turned negative in February for the first time since 2015, falling 0.4 per cent year on year.
Chances are that UK rates have peaked. If indeed an economic slowdown does approach and the BoE cuts rates, short gilt yields will fall further.
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