HSBC's Disagreement With Carney Fuels Call for 1% 10-Year Gilts

(Bloomberg) -- A disagreement with Bank of England Governor Mark Carney is at the heart of HSBC Bank’s call that the 10-year gilt yield will end the year at 1 percent.

Following the central bank’s decision to keep rates unchanged on Thursday, Carney said the nation’s underlying economic momentum "is going to reassert."

Daniela Russell, the London-based head of HSBC’s U.K. rates strategy, sees it differently, judging that the "economy has lost some underlying momentum." A stretch of consolidation awaits for the 10-year gilt before yields decline in the second half amid underwhelming economic activity, she said.

The strategist trimmed her year-end call for the 10-year gilt -- which was already the lowest among those surveyed by Bloomberg -- by 30 basis points to 1 percent in a note released ahead of the decision. The median forecast is for the yield to rise to 1.8 percent.

"If slack starts to open up in the labor market, given the housing market is weak, consumer confidence is depressed and individuals are having to contribute more to their pensions, we question how the consumer is going to fuel a rebound in growth," Russell said. "It looks like Bank of England tightening is done before it really got started."

Carney echoed similar risks in his press conference, but with a more positive outlook on how they would evolve. Nonetheless, a rate hike this year is no longer fully priced in, as monetary policymakers see inflation waning quicker than previously anticipated.

"The BOE sees a need to tighten, but at the same time they see only ’limited tightening’ as necessary. We read that as the BOE saying neutral, real rates are quite negative and not far above current levels," concludes George Pearkes, macro strategist at Bespoke Investment Group in Harrison, New York.

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