(Bloomberg) -- Abrdn Investment Management Ltd. has ramped up bets that the Bank of England will deliver deeper interest-rate cuts than what the market is expecting.
The £506 billion ($664 billion) asset manager is heavily overweight gilts over European government bonds and US Treasuries, because money markets are off the mark in their outlook for UK monetary policy, Matt Amis, an investment director at Edinburgh-based abrdn, said in an interview.
Swap traders are currently betting that the Federal Reserve and European Central Bank will settle at rates of just above 3% and 2% respectively over the next two years, compared to about 3.5% for the BOE.
Concerns over sticky UK services inflation, labor market constraints and a divided monetary policy committee are behind the divergence, said Amis, who contends that the trajectory for the three economies won’t be too dissimilar and that the BOE terminal rate will be closer to peers.
Still, the differing outlook has contributed to gilts underperforming their German and US counterparts so far this year, creating a buying opportunity for abrdn.
“On a cross-market basis, this is probably the most overweight gilts we’ve been in the last 12 to 18 months,” Amis said. “The BOE is mispriced versus the Fed and the ECB.”
The spread of benchmark 10-year UK bonds over Germany is currently around 171 basis points, near the widest level since May. Amis expects that the difference will move closer toward 140 to 150 basis points.
Britain’s economy is enjoying a goldilocks moment of slowing inflation, rising employment and healthy growth that’s setting the stage for a more comfortable backdrop for the BOE. Investors currently expect one or two more interest rate cuts this year after an Aug. 1 decision to ease from a 16-year high.
--With assistance from Ruth Carson.
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