Bond market is jettisoning UK negative-rate bets

Positive sentiment tempers expectations for further easing

LONDON: Traders are scrapping bets that the U.K. will implement negative rates this year, calling time on one of the most popular wagers of 2020 ahead of a Bank of England meeting that’s expected to address the debate.

As the central bank readies its first policy decision since an eleventh hour Brexit trade deal, investors have all but priced out the possibility of the BOE cutting borrowing costs below zero. Money-market levels now imply no more than a risk of the bank rate turning negative within the next year, and even then, the extreme is seen at a mere two basis points beneath zero. That contrasts with bets in September for the benchmark to fall to as low as minus 0.1% by late 2021, a 20-basis-point drop from current levels.

The long-awaited agreement between the EU and U.K. on trade and Britain’s relative success in the global coronavirus vaccination drive have helped ease investor pessimism toward the domestic economy, undermining expectations for aggressive monetary easing. Market speculation about sub-zero rates also took a knock after BOE Governor Andrew Bailey said this month that such policies raised many issues and may hurt banks’ lending to companies.

“The negative rates ship may have sailed,” Royal Bank of Canada strategists Peter Schaffrik and Cathal Kennedy wrote in a note. A long-standing forecaster of negative rates in the U.K., RBC said the option may still be kept on the table but it’s now less likely that it will be used.

While the U.K. was battered by the deepest recession in Europe last year, the nation’s progress in coronavirus vaccinations is fueling optimism the economy will find its footing faster than peers. Britain has immunized around five times as many people as a proportion of its population than the European Union — this has supported investor sentiment toward U.K. assets and tempered expectations for further monetary easing.

The BOE this week is due to publish the results of 160 detailed responses to a consultation about how borrowing costs could be pushed below zero for the first time since it was founded in 1694. The controversial policy, already tried in the European Union and Japan, turns banking on its head by charging for deposits while paying those who borrow money.

“The central bank is expected to conclude that while further rate cuts are technically feasible, this does not make them more likely to happen,” said Paul Hollingsworth, U.K. economist at BNP Paribas SA. “With good progress on the vaccine rollout since the Monetary Policy Committee’s last meeting setting the stage for a rebound in demand later this year, markets are right to reduce the implied probability of a near-term rate cut.”

Bets for negative rates are being scaled back elsewhere too. Traders from New Zealand to the U.S. now see a sub-zero move as increasingly unlikely, with policy makers largely favoring a “new conventional” mix of bond purchases and sector-specific aid programs.

Still, Britain’s bond yields are unlikely to rise anytime soon, with the BOE expected to maintain its current pace of debt purchases until May, according to Citigroup Inc.

“This does not seem like the right time to risk yields moving even a little higher,” wrote strategist Jamie Searle. adding that there was no pressure to slow the pace. “Stepping back, the bigger picture for 2021 hasn’t changed: supply and quantitative easing are broadly in balance and certainly supportive of stable yields/curves,” he added.

Germany, France and Spain will sell a total of about 26 billion euros ($32 billion) of bonds next week, according to Commerzbank AG, which includes an anticipated Finland syndication in its calculation. There are no redemptions until Feb. 25, when France is due to pay around 17 billion euros, while Italy pays over 4 billion euros of coupons next week.

The U.K. will hold three regular gilt auctions, selling a total of 6.75 billion pounds ($9.25 billion), and the BOE will buy back 4.4 billion pounds of debt in three operations. – Bloomberg

The Star, 01 February 2021 (Monday)