ING Sees Bonds Pressure as BoE Cuts £70bn Portfolio
The Bank of England is still trimming its bonds portfolio by around £70bn a year, and ING says that steady supply pressure can keep gilt yields rising. Political turmoil around Labour’s leadership adds another layer of pressure, while higher yields feed through to government borrowing costs and leave less room for easing.
Labour Leadership and £70bn QT
£70bn a year is the pace of the Bank of England’s quantitative tightening, and ING said that flow remains one of the main forces pushing gilt yields higher. A new prime minister could have a looser hand on fiscal policy, which would raise near-term spending and add more government bonds to the market.
60bp is the estimated amount by which the Bank’s bond reduction has steepened the GBP swap curve relative to the USD curve. ING said bank reserves have stabilised, so the Bank does not necessarily need to taper quantitative tightening because of financial stability concerns. For investors in UK rates, that leaves the balance of supply and policy still tilted toward higher yields.
Oil Prices and Inflation Risks
3.8% year-on-year was Tuesday’s headline US CPI reading for April, up from 2.4% before the war, and ING tied that move to higher real yields and higher inflation expectations. It said May is set to bring 4% inflation, with core inflation reaching 3% later down the line.
5% is the level ING said inflation could reach if the war goes on and on, and higher oil prices are the main culprit behind that risk. ING said gilt yields need inflation risks to ease before they can make a material move lower, which is why the oil price matters more here than a simple shift in market mood.
US Treasury Yield at 4.45%
4.45% is where the 10-year US Treasury yield stood at the time ING discussed the move, with 4.5% in its sights. Tuesday’s 10-year auction also had a slight tail, a sign that the market asked for a little more yield than expected to take down the debt.
4.5% would not just be a round number for US rates; it would also reinforce the broader backdrop of firmer global yields that UK gilts are trading against. ING said gilt yields are likely to remain higher for the time being unless oil makes a significant move lower, and that leaves borrowers facing a costlier market until inflation pressure eases.
