Bond Traders Eye Johnson, Brexit as BOE Decision Takes Back Seat

(Bloomberg) -- The Bank of England’s policy announcement next week will once again be overshadowed by Brexit for U.K. investors.

Gilts are headed for a third monthly rally ahead of the central bank’s policy decision due on Thursday, when it will also publish its quarterly inflation report. However, Prime Minister Boris Johnson’s arrival -- and his immediate Brexit deadlock with the European Union -- mean the bank is unlikely to impede the rally in gilts by hinting at interest-rate increases to curb inflation.

Gilts still offer positive yields with their returns dwarfing those on German bunds and French debt. The securities are gaining further support from the risk of no-deal Brexit, which flared after Johnson appointed Brexiteers to his cabinet and already hit a roadblock with Brussels over the Irish backstop.

“The Bank of England at this stage has taken a back seat,” said Pooja Kumra, European rates strategist at Toronto Dominion Bank. “Gilts are likely to see support from uncertainty around Brexit, as well as the upcoming support from BOE reinvestment in September.”

The yield on U.K. 10-year government bonds has fallen 14 basis points to 0.69% this month, having declined 50 basis points since the start of May. Kumra sees gilt yields pushing lower still if the U.S. Federal Reserve delivers a rate cut next week. A no-deal Brexit could see yields edging close to 0.50%, she said.

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