UK 2-year gilt yield falls to lowest since April 2023 at 4.643%, last down 5 bps on day

UK 2-year gilt yield falls to lowest since April 2023 at 4.643%, last down 5 bps on day

The UK 2-year gilt yield has reached its lowest level since April 2023, according to data from Trading Economics and other financial news outlets [1][2][3]. The yield, which was last quoted at 4.643% on August 1, has been on a downward trend, decreasing by 5 basis points on the day [1].

The decline in the UK 2-year gilt yield comes ahead of the Bank of England's (BoE) interest rate decision, which is scheduled for August 4 [2]. Market analysts are anticipating that the BoE may cut interest rates from their current 16-year high in response to weakening economic conditions and rising inflation [2][3].

Interest rate swaps, which are derived from the underlying cash market, are pricing in a 62% chance of a BoE rate cut today and 56 basis points of easing over the course of 2024 [2]. This suggests that investors are becoming increasingly bearish on the outlook for interest rates in the UK.

The decline in UK 2-year gilt yields has been driven by a number of factors, including weaker economic data, concerns over rising inflation, and expectations of further interest rate cuts by the BoE [1][2][3]. Additionally, the recent comments from the Federal Reserve, which opened the door to a September rate cut, have also contributed to the decline in UK yields [3].

Despite the decline in UK 2-year gilt yields, the spread between UK and German bonds remains relatively wide, with ten-year gilts offering around a 166 basis point yield premium over similar Bunds [2]. This suggests that investors are still seeking out higher yields in the UK relative to other major European economies.

In conclusion, the decline in the UK 2-year gilt yield to its lowest level since April 2023 is a reflection of weakening economic conditions, rising inflation, and expectations of further interest rate cuts by the Bank of England. The outlook for UK interest rates remains uncertain, and investors will be closely watching the BoE's interest rate decision on August 4 for further indications of the direction of the market.

References:

[1] Trading Economics. (2023, August 1). United Kingdom 2-Year Gilt Bond Yield. https://tradingeconomics.com/united-kingdom/2-year-note-yield

[2] Reuters. (2023, August 1). British two-year government bond yields fall to lowest since May 2023 ahead of BoE decision. https://www.reuters.com/business/finance/british-two-year-government-bond-yields-fall-to-lowest-since-may-2023-before-boe-decision-ncxtcvxmeyi5csj

[3] Nasdaq. (2023, October 30). UK 2-year gilt yield falls to four-month low ahead of BoE decision. https://www.nasdaq.com/articles/uk-2-year-gilt-yield-falls-to-four-month-low-ahead-of-boe-decision