Bonds: BoE expected to strike more hawkish note

These were the movements in some of the most widely-followed 10-year sovereign bond yields:

US: 2.49% (+4bp)

UK: 1.45% (+3bp)
Germany: 0.47% (+3bp)
France: 1.09% (+5bp)
Spain: 1.68% (+8bp)
Italy: 2.1% (+5bp)
Portugal: 4.21% (+2bp)
Greece: 7.64% (-17bp)
Japan: 0.10% (+1bp)

Prices for longer-dated Gilts were lower on Wednesday, pushed down by the overall trend globally amid stronger than expected readings on the state of manufacturing around the world and ahead of policy decisions from the Federal Reserve and Bank of England (alongside the Brexit bill vote and White Paper) later on Wednesday evening and on Thursday, respectively.

As regarded the latter, Samuel Tombs, chief UK economist at Pantheon Macroeconomics told clients that markets were right to expect the Monetary Policy Committee to sound a more 'hawkish' note in its latest Inflation Report, on Thursday.

"The MPC might also talk up the pound, as the cost shock is outweighing the competitiveness gain," he said.

Nonetheless, he concluded that: "the Committee, however, will raise rates only if wages accelerate; surveys point to the opposite."

That came as investors were pricing-in a 45% chance that Bank Rate would rise before 2017 was out, versus 30.0% at the time of the previous IR.

"Persuading markets to price in an even bigger chance of a rate hike this year likely would boost sterling. In turn, this would instantly reduce manufacturers’ cost pressures, which are now intense," he added.

He further pointed out how markets were discounting retail price inflation (based on the RPI index) rising to 3.5% in 2017 and staying there over the next decade.

RPI inflation tended to run about one percentage point above the consumer price index, Tombs explained.

Hence, the economist concluded, then current expectations for RPI embedded in market prices were hard to reconcile with the MPC's 2.0% target for the same.

As an aside, the BoE's latest reverse auction for Gilts maturing in between seven to 15 years' time attracted a bid-to-cover ratio of 3.57, down from 4.67 the last time around.