Interactive Investor

Bond Watch: Bank of England says peak interest rates in sight

Sam Benstead breaks down the latest news affecting bond investors, making the complicated world of fixed income investing simpler and easier to understand.

8th September 2023 11:18

by Sam Benstead from interactive investor

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Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.  

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.  

Here’s what you need to know this week.  

Are we there yet?

Bank of England boss Andrew Bailey said this week that interest rates are much nearer to their peak and inflation was on course for a “marked” decline.

He told MPs that interest rates were having an impact on the economy, which was taking pressure off price rises.

The Bank Rate is currently 5.25%, up from 0.1% at the end of 2021, following 14 consecutive rate rises.

In response, sterling fell against the dollar. It is down nearly 1% this week. Gilt yields were relatively stable, however.

The comments from Bailey suggest that the Bank of England is beginning to see signs that the economy is slowing and the impact of higher interest rates is having the desired effect.

This should be good news for bond markets, as lower inflation will allow the central bank to cut rates sooner, which should be positive for bond prices as they would be expected to rise.

The next interest rate decision is due on 21 September.

Why gilt sales are an ‘opportunity’ for investors

Changes to the quantitative tightening programme at the Bank of England, due to be announced at the September meeting, is hugely important for bond investors.

This is according to Columbia Threadneedle multi-asset manager Chistopher Mahon, who says that unwinding the quantitative easing programme, where it bought bonds to keep yields low and stimulate the economy, has big knock-on effects for government borrowing costs and therefore gilt yields.

He says that central banks have been cautious about selling bonds back to the market as prices are lower today than when they bought them. But the Bank of England has been the most aggressive at selling bonds, working at twice the pace of the European Central Bank.

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His calculations show that the Bank of England’s gilt sales have been equivalent to about 7.5% of all outstanding UK government debt: “a huge amount,” he says.

Mahon adds that these sales have been pushing down gilt prices, leading to bigger losses for gilt holders, but higher yields.

“The pace of such hefty selling pressure is one factor why gilts have struggled this year. Historically, UK government bonds attracted buyers without having to offer a yield premium to US government bonds. But not any more,” Mahon said.

The extra sales could be adding about 0.4% in borrowing costs to the UK’s debt, according to Mahon. He reckons with inflation now coming down, and peak rates in sight, this gives investors a buying opportunity and is why gilts and fixed income generally are attractively priced.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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