In a dramatic shift, hedge funds are scrambling to unwind their bets against Britain’s £2.5tn government bond market. This comes as growing investor consensus suggests that the Bank of England (BoE) is nearing the conclusion of its rate hiking campaign.
The latest data from S&P Global Market Intelligence reveals that the total value of UK bonds borrowed by investors to wager on price declines plummeted to under £65 billion this week, marking its lowest point since at least 2006. Although it saw a slight uptick after the BoE’s interest rate pause on Thursday, the decline in short positions is indicative of a significant market sentiment shift.
Gilts, which had been the worst-performing leading sovereign debt market in the first half of the year, have recently staged a comeback. An Ice Bank of America index of gilts has risen by 2.7% over the past month, although it remains down by over 3% since the year’s start.
Nikolay Markov, senior economist at Pictet Asset Management, commented, “I think we have reached terminal rates in the UK.” He highlighted softer-than-expected inflation and the absence of anticipated labor market impacts as factors contributing to the shift in sentiment towards long gilts.
The decline in short positions comes as investors anticipate an end to the BoE’s tightening cycle, with markets now pricing in a 60% probability of one more rate rise to 5.5% by early next year.
James Bilson, a fixed-income strategist at Schroders, noted, “We believe the medium-term fundamentals for UK gilts have improved given a weakening growth outlook, a softening labor market, and an improving outlook for domestic inflation.”
While some investors remain cautious due to inflation concerns, the BoE’s decision to accelerate its quantitative tightening program and the shifting economic landscape have led to a significant reevaluation of positions in the UK government bond market.
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By: Delino Gayweh
Serrari Financial Analyst
24th September, 2023
