UK bond market flashes economic warning after hot inflation data

Britain’s short-term government bonds sold off sharply on Wednesday as scorching inflation data raised expectations for an interest rate hike at the Bank of England, sending a gauge of concern about Britain’s economic outlook to the highest level since 2008.

Two-year Treasury yields, which are influenced by monetary policy expectations, rose 0.24 percentage point in the morning’s moves to 2.39 percent. Long-term bonds came under softer selling pressure, with the 10-year yield rising 0.11 percentage point to 2.23 percent.

The moves left two-year bond yields trading more than 0.15 percentage point above their 10-year peers, the largest “reversal” of Britain’s yield curve since the 2008 global financial crisis.

James Athey, Abrdn’s chief investment officer, said the two-year bond sale “tells us that the market thinks the bank rate needs to go up”.

He added, “The positioning of reality has exacerbated this a lot…[due to]The Bank of England’s loose stance and the notion of peak inflation”, whereby those who thought the UK had already reached peak inflation were now selling their holdings for fear of a worse-than-expected situation.

Investors typically demand higher borrowing costs for the risk of buying bonds maturing in the future, which means yield curves typically slope upward.

The inverted curve is a sign that investors expect the BoE will need to raise interest rates sharply in the near term to tame inflation, something that is expected to lead to a contraction in economic output in the future.

After data released on Wednesday showing UK consumer prices rose at an annual rate of 10.1 per cent in July – the highest rate of inflation in more than 40 years and bigger than economists had expected – traders now expect a two-percentage-point increase from the Bank of England’s rate. . May next year, as traders expect a 0.5 percentage point increase at the next Bank of England meeting in September.

The day before, markets were pointing to 1.6 percentage points of interest rate hikes.

The central bank has already raised its key interest rate from 0.1 per cent in November 2021 to 1.75 per cent this month.

“Unless wage growth and therefore underlying inflationary pressures moderate on their own without a rise in unemployment, UK policymakers are stuck between a rock and a hard place,” said Mike Bell, global market strategist at JPMorgan Asset Management.

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