Investors eye gold bids as analysts say markets have ‘overreacted’

British bonds could prove a lucrative bargain as analysts forecast an imminent recovery after UK government debt sold off sharply ahead of the autumn budget.

Two-, five- and 10-year bond yields have fallen almost 40 basis points each over the past month as markets have digested the impact of £40 billion in tax rises, public spending increases and the possibility of smaller interest rate cuts from the Bank of England.

Market prices now suggest the BofE base rate will stabilize at 4 percent by the end of 2025, 75 basis points below its current level of 4.75 percent and 50 basis points ahead of terminal rate expectations. from 3.5 percent just a month ago.

Samuel Adams, an economist at UBS, blamed “divided minds over the outlook for interest rates appear to bear much of the responsibility” for the bond market swings, as opposed to “concerns about fiscally lax politicians.” .

And he added: “We believe that this is an opportunity that we must take advantage of.” After all, vibrations about the economy can change faster than we think.”

New data from the Office for National Statistics on Wednesday will shed light on the bank’s battle against inflation, with forecasters predicting the Consumer Price Index rate will rise from 1.7 to 2.2 per cent in October.

Thomas Watts, senior investment analyst at Abrdn, said: “With many economists now expecting the Bank of England to pause any further rate cuts during 2024 and even reduce such moves over the next year following an inflation-inducing budget, The numbers will take added importance and could perhaps help set the tone for the rest of the year.

Markets now expect the bank to delay its next rate cut until March – or even June – next year, but significant progress on difficult services inflation this week could quickly change forecasts.

Analysts at ING said markets have “overreacted to the recent UK budget announcement” and “become too aggressive with BofE cuts”.

ING expects 10-year yields to fall back to 4 percent by mid-2025, “significantly below” their current level of 4.4 percent.

However, analysts warned that the market would need to see a “series of better services inflation figures” to convince traders “of the BofE’s ability to cut more than the meager two or three total cuts currently priced in.”

BlackRock is currently overweight government bonds, which it believes will benefit as the BofE prepares to “cut rates more than the market is pricing in given a weak economy.”

And some groups of retail investors appear well positioned if yields – which move inversely to price – decline.

TN25, a bond maturing in January 2025 with a coupon of 0.25 percent, was the most held position among the 25-34, 35-44 and 45-54 age groups among Interactive Investor users in the third quarter.

Similarly, exchange-traded funds that track gilts saw inflows of $800 million in October, according to Invesco.

Kyle Caldwell, funds and investment education editor at Interactive Investor, said: ‘As interest rates rise, so do bond yields.

‘As a result, income seekers have more choice and can take on less risk, as the safest types of bonds, such as gilts, offer yields of around 4 per cent, compared with virtually nothing when interest rates were at minimum levels.

“Falling interest rates could act as a catalyst for a change in fortunes for alternative income strategies, as well as other investment funds that have fallen out of favor.”