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UK government bonds rebound as high inflation still fails to change interest rate cut expectations
Jin10 data reports on August 20, the UK government bonds rebounded strongly on Wednesday, with the 10-year yield ending a four-day streak of rises. The yield is heading towards its largest drop in a month. The inflation report had little impact on this year's rate cut expectations, but bets on further cuts next year have increased. Swap contracts currently imply about a 75% probability of the interest rate being lowered to 3.5% by the end of next year, a shift that partly explains the movement of UK government bonds. Macro strategist Conor Cooper said: "Many still believe that regardless of inflation, the Bank of England will eventually lower rates to below 3.75%. If the Bank of England is forced to maintain tight policy in the short term to ensure inflation is controlled, then the already troubled economy will bear even greater pressure, ultimately requiring a faster pace of rate cuts than previously envisioned after inflation stabilizes. This is favourable information for UK government bonds and may also be a factor that traders will consider when interpreting UK inflation data in the coming months."