The gilt market has wasted little time in reacting to U.K. success in vaccinating more than one-third of its adults, with 10-year yields more than tripling in 2021. Yields and spreads can keep widening vs. still-stagnant European bonds, according to a new report from Bloomberg Intelligence, Leading With the Jab, though recent good news on U.K. public finances could limit the surge, it adds.
Huw Worthington, BI Rates Strategist, Bloomberg Intelligence, said: “Britain's rollout of Covid-19 vaccines beat its target of jabbing its 15 million most vulnerable citizens -- mainly over 70s -- by mid-February. Vaccines are now being administered to the 50-70-year old crowd, which accounts for about half of Covid hospitalizations in the U.K, says BI. The gilt market is watching the vaccine rollout, with the rise in yields accelerating with the pace of inoculations.
“It took 40 days to vaccinate the first 10% of U.K. adults, but this fell to 13 days for the next 10% and just a dozen days for the last 10%, with about 35% of U.K. adults now having been jabbed.”
Money Markets See Signs of Normal U.K. Rates
Markets have moved from expectations in early January of near-zero or negative policy rates in the U.K. for the next 10 years to speculation of a BOE rate hike in the next 3-4 years. U.K. overnight rates in 3-4 years as represented by SONIA have risen by 20-30 bps. The BOE cut its 2021 growth forecast to 5.1% from 7.1%, reflecting the 1Q lockdown and the economy shrinking 4.2%. But the market seems to be ignoring that, states BI, and is keener on BOE expectations of a sharp acceleration in growth to 5.2% in 2Q and 4.6% in 3Q, with GDP back to pre-virus levels by 1Q22.
Huw Worthington, BI Rates Strategist, Bloomberg Intelligence, said: “If the U.K. recovery takes hold as expected, we could see further moves higher, as 2-year yields are now just 5 bps, while 5-year yields have gone from negative territory to 28 bps in a month, illustrating how quickly sentiment can change.”
Gilt Yields Breaking Out of Old Trading Ranges vs. U.S., Germany
Yields on 10-year gilt entered 2021 at just 17 bps, but have since risen more than 50 bps, peaking intraday at 73 bps before settling more recently at 70 bps. At the same time, yield spreads vs. other developed markets have risen too. Gilts have widened by 25 bps vs. 10-year German bonds, taking the yield premium to more than 1% now. Gilt yields have also risen 15-bp faster than their U.S. counterparts YTD, taking the yield gap to less than 70 bps.
Huw Worthington, BI Rates Strategist, Bloomberg Intelligence, said: “The moves have left 10-year gilt yields at post-pandemic highs and back into their old 0.85-1.25% trading range vs. bunds and just below their minus 0.3-0.7% range vs U.S. Treasury bonds. As the U.K. lockdown is incrementally lifted alongside the vaccine rollout, gilts may have the potential to move toward the top end of these new trading ranges.”
