USB, HSBC say gilts are not a ‘sell’ on news of Brexit deal

LONDON: Investor sentiment on gilts soured after the UK clinched a Brexit transition deal with the European Union. But that mood isn’t likely to last.

All the market telegraphed was that the Bank of England will more likely than not raise its policy rate in May, according to UBS Group AG. As the realities of the challenging path ahead for the UK economy become clearer, gilts will be bought again, HSBC Holdings Plc said.

“Even if you get a short-term rise in yields in the front end in response to a transitional deal, that will run out of steam later in the year as it becomes evident that the problems that lie ahead are much greater than the ones that have been negotiated,” said John Wraith, head of UK rates strategy at UBS.

Benchmark gilt yields jumped as much as eight basis points to 1.51% on Monday, while the spread to German bunds increased to 88 basis points, the widest this month. Wraith sees the gap narrowing to 50 basis points by the end of this year, a level last seen in 2013.

“We see quite a significant cross market outperformance” in UK bonds, Wraith said. “We would caution that this deal isn’t a sort of panacea.

“As you move into summer and the second half of the year and suddenly the focus intensifies on that withdrawal agreement, it will start to have implications for the market.”

Monday’s pact supports the view that the Bank of England (BoE) will raise rates in May, with markets already pricing a more than 80% probability of that happening.

This week’s data, which include employment numbers, “will be just as important – if not even more so,” said Daniela Russell, head of UK rates strategy at HSBC. — Bloomberg