Bond rally euphoria faces UK reality check
LONDON: A global bond rally ignited by signs that inflation in the world’s largest economy is finally slowing once again faces a reality check this week.

Government debt from around the world is enjoying its best month of the year after a gauge of price pressures in the United States last week ebbed for the first time in six months.

In the United States, that’s encouraged bets that interest rate reductions by the US Federal Reserve are just around the corner, and elsewhere, it’s reassured investors that their central banks also have room to cut.

But attention is now turning to an inflation report in the United Kingdom.

While prices there have moderated significantly since late 2022, when the inflation rate hit a heady 11.1%, investors warn the downward path for prices isn’t plain sailing.

For markets, it’s the latest checkpoint in a bumpy journey to find out if the global fight against historic levels of inflation is finally nearing an end.

“Next week’s UK consumer price index print will be important, and we see a risk that this declines by less than many have hoped for,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

“This could place enthusiasm for rate cuts onto more of a back burner.”

A near-euphoria has rippled across markets in recent days, predicated on the notion that the era of aggressive price pressures is ending.

Indeed, a report due tomorrow is expected to show UK inflation slowed from 3.2% to 2.1% in April, within a whisker of the Bank of England’s (BoE) official target.

But a hotter-than-expected figure could lead traders to dismantle recent bets on a rate cut from the BoE as soon as June, and call into question whether investors around the world have gotten ahead of themselves.

“The crucial takeaway will be the evolution of inflation beyond the spring,” said Ven Ram, a cross-assets strategist for MLIV in Dubai.

“Core and services inflation for April are expected to stay sticky at higher levels, so the head room for the BoE to cut interest rates is minimal.”

Money-market pricing in the UK currently implies a 50% chance of a quarter-point reduction next month, and two in total this year.

In the United States, traders see a 75% probability of a cut in September. And in Europe, a June cut is all but certain, swaps pricing suggested.

“In the United Kingdom, it’s not that we have good evidence that inflation expectations are unanchored, but if there is a risk of them being unanchored anywhere, the United Kingdom would be it,” said Ralf Preusser, global head of G-10 foreign exchange and rates at Bank of America Corp.

He recommended betting against UK real rates versus France, on the basis that the eurozone economy faces lower inflationary risks.

While the United Kingdom’s benchmark 10-year bond yield fell for a third straight week through last Friday, the longest streak of declines this year, the UK’s outlook has been holding gilts back from a major rally of the kind experienced by treasuries.

US bonds have been on a tear, with 10-year yields down more than 30 basis points from their year-to-date high, trimming losses for the market this year to about 1.4%.

In contrast, a Bloomberg index tracking gilts remained down more than 2% this year.

“It is too soon to be long UK gilts at the current juncture because services inflation remains much too sticky,” said Chester Ntonifor, a strategist at BCA Research. — Bloomberg
Economy
LONDON: A global bond rally ignited by signs that inflation in the world’s largest economy is finally slowing once again faces a reality check this week.Government debt from around the world is enjoying its best month of the year after a gauge of price pressures in the United States last week ebbed for the first time in six months.