Interactive Investor

Bond Watch: these are the odds of a rate cut in June

Sam Benstead breaks down the latest news affecting bond investors.

10th May 2024 09:41

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.               

No cut yet, but it’s not far off 

The Bank of England (BoE) held interest rates steady at 5.25% for the sixth time in a row, but the Monetary Policy Committee (MPC) edged closer to cutting interest rates. 

In total, two of the nine members MPC voted to cut interest rates by 0.25 percentage points, compared with seven who voted to leave them unchanged.  

The consumer price index (CPI) inflation rate fell to its lowest level in two and a half years in March. Prices rose 3.2% in March, down from 3.4% in February, and are expected to fall to the 2% target over the coming months. This gives the BoE some breathing room. 

Vivek Paul, UK chief investment strategist at the BlackRock Investment Institute, says the Bank is on the brink of cutting rates, but isn’t quite there yet.  

“Markets now see a reasonable chance of a first cut in June, but still only two cuts this year. That’s down from six in January, influenced by stalling inflation progress in the US. When the Bank does start cutting, we think it will cut more than the US Federal Reserve over the next two years given the UK's weaker growth outlook,” he said.  

When rates fall, bond prices tend to follow. For that reason, BlackRock prefers gilts to other developed market bonds. 

However, gilt yields were flat following the decision, suggesting that investors had already priced in a more dovish decision from the Bank of England.  

Orla Garvey, senior portfolio manager at fund group Federated Hermes, says that while a June cut is likely, there are still clear concerns around wage growth and so the MPC is guiding a data-dependent approach.  

“Going into today, the market was broadly expecting the dovish tilt they delivered, hence the muted response from gilts post the meeting. The market is currently fully priced for a 25 basis point cut in August and around 50/50 for June, which is consistent with the release today. Any further changes in June pricing will be driven by data out-turns,” she said.  

Gilt yield update 

Gilts offer investing inflation-beating yields and considerable tax savings, as no capital gains is owed. Here is the key data you need on the five most-popular gilts by assets on the ii platform. 

Gilt  

Yield to maturity (%) 

Stock market ticker 

Price 

UNITED KINGDOM 0.25 31/01/2025 (LSE:TN25)

4.6 

TN25 

96.9 

UNITED KINGDOM 0.125 30/01/2026 (LSE:T26)

4.3 

T26 

93.2 

5% Treasury Stock 2025 (LSE:TR25)

4.8 

TR25 

100.2 

UNITED KINGDOM 0.125 31/01/2028 (LSE:TN28)

TN28 

86.5 

UNITED KINGDOM 0.5 22/10/2061 (LSE:TG61)

4.2 

TG61 

30 

Source: TradeWeb, 8 May 2024. 

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