Bri­tain do­ing bet­ter than the mar­kets

The Pak Banker - - MARKETS/SPORTS -

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.

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