UK notes with two-year yields have moved slightly amid speculation the economy is not growing fast e...
UK notes with two-year yields have moved slightly amid speculation the economy is not growing fast enough to warrant the Bank of England to raise interest rates in the near future.
As of 29 April, the 5% note maturing in June 2004 fell 0.02%, raising its yield one basis point to 4.75%.
Mike Lenhoff, chief global strategist at Gerrard, says the Deputy Governor of the Bank of England, who is generally viewed to be on the hawkish side of the debate concerning rate rises, has indicated that while there is a clear need for the economy to rebalance, it is still too soon to be confident that recovery is entrenched. He says: 'Against this backdrop, it seems improbable that the Monetary Policy Committee will decide to increase base rates for at least the next few months. Indeed, if the deceleration in retail spending growth proves to be sustainable and pricing power remains largely absent, it is quite conceivable that the authorities will look to keep policy on hold for rather longer. We are sticking to our view that base rates will end the year only marginally above current levels at 4.25%.'
Lenhoff adds that UK gilts remain locked in a tight trading band and says there is little reason to expect yields to move higher in the near term. Gerrard's outlook is that UK government bonds will continue to trade sideways in the short term.
Gilt yields did edge higher following the 17 April Budget announcement, which led many to believe that the Government will have to increase issuance.
According to Threadneedle's bond team, the Chancellor's growth forecasts were optimistic and further gilt issuance may be necessary to meet the additional £24bn of expenditure announced in the Budget.
The expenditure outlined in the Budget and the Government's slightly looser monetary policy will raise yields in the gilt market but only at the margins, according to Paul Read, bond fund manager at Invesco Perpetual. He says: 'At the margin, we may see some creeping issuance but I do not think Gordon Brown wants to issue too much and he is likely to be fairly prudent about it.'
In fact, shortly after the Budget was released, the UK Debt Management Office (DMO), the Treasury's financing arm, said it would sell £600m less of gilts maturing in 15 years and longer.
Prior to the Budget, the DMO said it planned to raise £23bn from bond sales starting 1 April, up from the £13.75bn in the year ending 31 March. It will now seek to raise £22.4bn.
According to Bloomberg reports, gilt sales will comprise £5.5bn in short-maturity debt, £5.5bn in medium-dated bonds and £6.9bn in conventional bonds due in 15 years or more, plus £4.5bn in index-linked gilts.
The short end of US government bonds meanwhile are suffering as concerns grow that the federal budget deficit will mean the Government has to increase sales of Treasuries.
On 29 April, the 3.375% note, maturing in April 2004, fell more than 2%, its yield adding three basis points to 3.24%. According to Bloomberg, earlier in April, the US Treasury sold $25bn in two-year bonds, unchanged from its previous offerings, but worries about a growing deficit has created pressure on the short end of the curve.
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