U.K. Bond Market Turmoil Subsides, with Sterling Showing Stability

The Bank of England (BoE) governor, Andrew Bailey, has suggested that British interest rates will continue to fall, but the picture beyond the September 18 meeting remains unclear, according to derivatives market predictions.

In a recent development, the chance of a UK interest rate cut in November has decreased from 67% to 18%. This shift in sentiment is likely due to Andrew Bailey's comments about more doubt surrounding when and how quickly further steps can be made.

On the fiscal front, Finance Minister Rachel Reeves is set to present the autumn budget on November 26. Reeves, who is the UK Chancellor of the Exchequer, is under pressure to keep the government's finances on track and has vowed to control spending to help reduce inflation and borrowing costs.

Meanwhile, the derivatives market shows that traders are assuming the BoE will cut rates at its meeting on September 18. However, the uncertainty about the pace of interest rate cuts persists, as Bailey has also expressed concerns about this matter.

The British pound is currently steady against the euro, holding at 86.67 pence. Despite this, it is trading at US$1.3455, a decrease from its peak in July at US$1.38. Kathleen Brooks, research director at XTB, expects UK yields to reverse recent gains but remain higher than those of peers for some time.

This higher yield in British government bonds is due to concerns about the outlook for inflation, not optimism about long-term growth. In fact, yields on 30-year British government bonds, or gilts, have risen to their highest since 1998. A 10-year gilt yields 4.74%, which is higher than the 4.2% yield for an equivalent US Treasury and the 1.6% yield for low-yielder Japan.

Bond investors are concerned about the high borrowing costs in Britain, which are the highest among the Group of Seven advanced economies. This concern is likely to be a key factor in the upcoming autumn budget presentation by Rachel Reeves.

In a related note, Andrew Bailey reiterated his comments about interest rate cuts after August's rate cut. His statements continue to influence market expectations and the broader economic outlook for the UK.

In conclusion, the British economy is currently facing challenges in terms of interest rate cuts, borrowing costs, and inflation. The autumn budget, to be presented by Rachel Reeves, will be a crucial event in addressing these issues and shaping the UK's economic future.