UK gilts surge on easing hopes from BOE, Moody’s lower growth outlook

The UK gilts strengthened on Monday as investors were expecting a rate cut from the Bank of England in its Thursday’s monetary policy meeting. Also, investors shifted to safe-haven buying after Moody's lowered its UK growth forecasts due to the Brexit vote last month.

The yield on the benchmark 10-year gilts fell nearly 2 basis points to 0.717 percent, yield on super-long 40-year bonds dipped 1-1/2 basis points to 1.386 percent and the yield on short-term 3-year bonds slid 1 basis point to 0.203 percent by 09:40 GMT.

The Bank of England is also expected to ease interest rates in its monetary policy meeting scheduled to be held on July 14, in an attempt to ease the growing anxiety over the possible breakdown after the Brexit outcome.

The UK as it could herald the first BoE Bank Rate cut since Feb 2009. There is a low probability, but non-negligible risk, that the central bank also resumes its programme of asset purchases, financed through reserves issuance, although this is more likely in August. So it is likely that we see a 25 basis points rate cut on Thursday that takes the Bank Rate down to a record low 0.25 percent.

Moreover, the Moody's, a bond credit rating company lowered its UK growth forecasts due to the Brexit vote, to 1.5 percent for this year, down from 1.8 percent in its earlier forecast and to 1.2 percent for 2017 (sharply lower from 2.1 percent).

In terms of data, the UK like-for-like retail sales fell 3.6 percent in June, the worst result for that month in more than a decade. Also, the UK Gfk headline consumer confidence index dropped to -9 in July, from -1 in June. It fell at the fastest pace in 22 years after the ‘Brexit’ vote, remaining well below the 12-month average of zero.

Lastly, as for the economic indicators, the RICS housing market report for January and May construction output figures are due and should reveal softness. The minutes of the MPC meeting will also be published and will provide the rationale behind the BoE’s expected policy action as well as clues about what its next move is likely to be. Of fleeting interest will be the BRC retail sales monitor for Jun, which is likely to reveal weakness, especially in the days following the UK’s decision to ‘Brexit’. The BoE Credit Conditions Survey for Q2 is also awaited.

Meanwhile, the FTSE 100 trading higher 0.64 percent at 6,633 by 09:40 GMT.