Assessing the Sterling and TIC Data: What's Already Priced In?

The prevailing market narrative is one of cautious optimism, but a closer look suggests the core story is already priced in. Sterling yields have rallied, and foreign investors are piling into U.S. Treasuries, yet these moves reflect a shift in sentiment rather than a fundamental change in the underlying trend of easing policy and improving fiscal stability.

On the UK side, the recent strength in sterling rates is driven by a specific signal: the 5-year gilt yield is underperforming the rest of the curve. This typically signals a more positive view on the business cycle, pushing back expectations for a Bank of England rate cut. The market now prices in just 9 basis points of a cut for March, a clear retreat from earlier bets. This optimism is fragile, however. It hinges on growth data and could be quickly reversed by hawkish inflation prints, as strategists note. The broader trend, though, remains one of gradual easing. The BoE's benchmark rate is now 3.75%, and markets see only one more cut priced in for 2026, suggesting the easing cycle is nearing its end. The rally in sterling yields is a reaction to a temporary shift in growth sentiment, not a reversal of the long-term policy drift.

Across the Atlantic, the story is similar. Foreign holdings of U.S. Treasuries hit a record high of $9.355 trillion in November, a 7.2% year-over-year increase. This surge followed improved market sentiment after the government shutdown ended. The inflows were robust, with foreigners buying a net $112bn in bonds for the month. Yet this record buying is consistent with a narrative of stability returning, not a new discovery of value. The core trend of foreign investors seeking safe-haven dollar assets amid global uncertainty is already well established. The record level is the endpoint of a steady accumulation, not a sudden, unexpected inflection.

The bottom line is one of expectations gap. The market has priced in a period of policy easing and fiscal improvement. The recent moves-sterling yields pushing back on a March cut, foreign Treasuries hitting record highs-are the market digesting and adjusting to new data points within that established framework. For the narrative to shift meaningfully, the data would need to consistently contradict the trend of lower inflation and a still-moderate growth outlook. Until then, the rally may be more about sentiment than substance.

Testing the Consensus: Data vs. Expectations

The market's recent optimism is being tested against a backdrop of solid data and persistent policy uncertainty. On the surface, the numbers support a gradual easing path. UK inflation slowed to 3.2% in November, the lowest in eight months and below the Bank of England's forecast. This aligns with the BoE's own view that rates are on a gradual downward path. Yet the consensus view of an easy, predictable cycle faces a stark reality check: the Bank's own Monetary Policy Committee (MPC) remains deeply divided.

At its last meeting, four members voted to keep rates unchanged, highlighting a significant policy split. This internal disagreement underscores that the "gradual" path is not a foregone conclusion. The market has priced in a near-end to the easing cycle, with only one more cut fully anticipated for 2026. But the MPC's division suggests that the data-especially on wage growth and services inflation-could easily push the debate in either direction, keeping the risk of a policy misstep alive.

Furthermore, the recent strength in sterling yields appears to be driven by more than just global trends. After the US election, UK 20-year gilt yields rose more than German yields. This divergence points to UK-specific factors at play, such as fiscal policy expectations or domestic growth concerns, that are influencing the market independently of broader global forces. In other words, the rally in UK yields is not simply a mechanical reaction to higher US rates; it reflects a distinct reassessment of the UK's economic outlook.

The bottom line is an expectations gap. The market narrative is one of a smooth, data-dependent easing cycle. The reality, however, is a central bank at odds with itself and a yield curve that is being shaped by domestic pressures. For now, the data supports the BoE's gradualism, but the policy uncertainty and the UK-specific moves in long-term yields suggest the consensus view may be underestimating the fragility of that alignment.

Valuation and Catalysts: What's Left to Play For?

The current setup offers a clear asymmetry. The market has already priced in a near-end to the Bank of England's easing cycle, with the probability of a March cut now just 9bp priced in. This leaves little room for further dovish surprise from the BoE itself. The risk/reward now hinges on data that could either confirm the hawkish shift or force a recalibration. Next week's inflation and jobs data are critical. A hawkish aftertaste, driven by a rise in services inflation from a still-hot 4.4% to 4.6% and a lower unemployment rate, could push the first cut expectation to April. Yet even that move may not alter the broader trend of cooling inflation and muted growth that supports the BoE's neutral stance. The key risk is that services inflation remains hot, but the broader trend of cooling wage growth supports the BoE's neutral stance.

On the U.S. side, the record foreign inflows into Treasuries are a known quantity. The next catalyst is the follow-through. The next Treasury International Capital (TIC) data release, covering December, is scheduled for February 18, 2026. This report will show if the robust net buying of $112bn in November was a one-off or the start of a sustained trend. The data shows a clear pattern of accumulation, with foreigners buying a net $740bn in bonds from January to November. But the sustainability of that flow is the question. The next release will provide a crucial check on whether the record high foreign holdings of $9.355 trillion are being maintained or if the recent surge is fading.

The bottom line is one of waiting for confirmation. For sterling, the rally in yields is priced for a growth optimism that could quickly reverse if data disappoints. For U.S. Treasuries, the record foreign ownership is the baseline; the next data point will test its durability. In both cases, the consensus view is already reflected in prices. The only way to break it is with data that consistently contradicts the established trends of cooling inflation and steady foreign demand. Until then, the moves are likely to be reactive, not revolutionary.