Rates Update: BOE  leaves room for Gilt yields to spike amid a Brexit deal. Federal Reserve decision leave Treasuries unchanged.

Rates Update: BOE leaves room for Gilt yields to spike amid a Brexit deal. Federal Reserve decision leave Treasuries unchanged.

Bonds
Althea Spinozzi

Senior Fixed Income Strategist

Summary:  The Bank of England maintains monetary policy unchanged amid unusual uncertainty. It implies that Gilt yields are free to spike in case a Brexit deal comes through. Ten-year Gilt yields will easily break their resistance line at 0.45% in case of a Brexit deal, and they will continue to rise towards 1%, until the BOE steps in to slow them down. On the other side of the Atlantic, Treasury yields were muted yesterday after the FOMC meeting. The Federal Reserve didn't change its bond-buying program and gave better than expected economic forecast. Yet, ten-year yields continue to trade within their ascending wedge and are likely to break above the pivotal 1% as a fiscal stimulus is approved, and Biden enters in the White House.


Bond yields are poised to rise on both sides of the Atlantic.

The Bank of England didn't make any changes to its policy benchmark rate and QE purchases, precisely as expected by the market. It is therefore leaving Gilt yields free to rise in case of a Brexit deal, which should materialize in the coming days.

Let’s refresh some critical levels in ten-year Gilt yields:

  • Brexit deal scenario: In case of a Brexit deal, yields will spike. By maintaining its monetary policy unchanged, the BOE has enabled yields to rise fast. Ten-year yields are poised to break above the 0.45% resistance line.
  • Hard Brexit scenario: ten-year yields will fall and test their support line at 0.20%. Yields are likely to break this level easily (as they already did last week) and will continue to fall until they try the benchmark interest rate at 0.10%. In case the ten-year yields break this level, it means that the market heavily relies on a rate cut from the BOE, which at this point might even consider negative-rates.
Source: Bloomberg.

On the other side of the Atlantic, Treasury yields were muted during the Federal Reserve decision yesterday. Even though the Fed didn't deliver on market expectations, ten-year yields went nowhere near the pivotal 1% level that we have been monitoring in the past few months. It was enough for the Fed to signal it will hold rates near zero until 2023, and that it will continue with its bond-buying program, to kill volatility in the bond market. The Fed specified that this program would continue until it does not see a "substantial" improvement in unemployment and inflation.   The word "substantial"  is vague, and for as much as the market knows, adequate unemployment numbers and inflation might be reached as fast as next year. I expect the reflationary narrative to find momentum as a stimulus bill is passed and Biden enters the White House.

Teb-year yield can only rise. At present, yields are trading on the lower part of the ascending wedge they have been trading in from August until today. However, if we consider that a democratic white house and a fiscal stimulus are coming, hence yields should break the pivotal 1% and test the upper resistance line above that level. Bond yields have an inverse relationship with bond prices.

Source: Bloomberg.
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.