Britain doing better than the markets
UK government-bond yields might be at odds with Britain's status as one of the fastest-growing economies among the richest nations.
Two-year gilt yields dropped 0.31 percentage point this month, the most since August 2009. UBS Group AG says that kind of pricing in the market is not justified by economic fundamentals. The Swiss bank along with Scotiabank Europe Plc says that investors may be reminded of that on Feb. 4 when the Bank of England releases growth and inflation forecasts.
The skew in the market is partly because of renewed investor concern about the fallout from sputtering Chinese growth, the stock market rout and tumbling commodity prices that are driving demand for haven assets like gilts.
"Yields at these levels are not justified by the U.K. economic fundamentals," said John Wraith, head of U.K. rates strategy at UBS in London. "The market doesn't price in a rate increase until next year, and it will probably be told next week that it's priced too dovishly."
Forward contracts based on the sterling overnight index average, or Sonia, show traders aren't fully pricing in a quarterpoint increase to the BOE's 0.5 percent bank rate until after March 2017.
The yield on 10-year gilts fell 40 basis points, or 0.40 percentage point, to 1.56 percent in the month. That's the biggest drop in one year. The 2 percent gilt due in September 2025 rose 3.555, or 35.55 pounds per 1,000-pound ($1,422) face amount, to 103.905. Bank of England policy makers are scheduled to announce their latest interest-rate decision Feb. 4, when they also publish the forecasts in the much-anticipated Inflation Report.
Officials including Governor Mark Carney and Kristin Forbes have said they're waiting for wages to increase before increasing the key rate from a record-low 0.5 percent.