UK yields: downside risk in the 0-2Y segment in coming months - Danske Bank

Analysts from Danske Bank, see market pricing as slightly on the hawkish side (second rate hike from Bank of England priced in by November 2018 and the third in Q4 20) pointing to some downside risk in the 0-2Y segment in coming months. 

Key Quotes: 

“As expected, the Bank of England (BoE) raised the Bank Rate by 25bp to 0.50% from 0.25%, with a vote count of 7-2, at the November MPC meeting. It was a dovish hike in the sense that the MPC refrained from commenting on future rate hikes.”

“CPI inflation was unchanged at 3.0% y/y in October. The increase in inflation should be temporary as much is due to the past weakening of the GBP. Moreover, wage growth remains subdued and while the unemployment rate fell to 2.2% in September (down from an upward revised 2.3% in August), there are signs the labour market may be slowing as the number of employed people fell (for the first time in almost a year). Hence, data still support our view that BoE will stay on hold in 2018 and not hike again before 2019.”

“With a second rate hike priced in by November 2018 and the third in Q4 20, we see market pricing as slightly on the hawkish side pointing to some downside risk in the 0-2Y segment in coming months. Further out on the yield curve, we look for yields to trade around current levels in coming months. On a 6-12M horizon, we expect the 2Y10Y yield curve to steepen moderately, with the long end of the curve being driven by higher yields in the US and Europe.”