(Bloomberg) – Pound headed for its biggest rally in months and UK bonds rallied after a historic sell-off as some investors bought up the country’s troubled assets.
Sterling climbed more than 1% to above $1.08 after falling to a record low on Monday, while two-year government bond yields fell by as much as 32 basis points in the biggest drop since 2008. Sterling corporate bonds stabilized.
The recovery leaves UK markets still vulnerable after a slump that began late last week when Chancellor Kwasi Kwarteng unveiled the country’s biggest tax giveaway in half a century. This triggered a bond and currency meltdown as traders digested the impact on the country’s finances.
“Gilts at these levels are looking quite attractive now,” Eric Lonergan, portfolio manager at M&G Plc, said in an interview on Monday. Price action looked “more like panic than a considered assessment of the future path of UK interest rates”.
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Gilts rose on Tuesday as traders scaled back bets on how much monetary tightening the Bank of England will undertake to fight inflation. Money markets are trading at around 155 basis points through the next November session, down from around 165 basis points at Monday’s close.
The BOE vowed on Monday to change interest rates “as much as needed” to calm market nerves and is “very closely monitoring developments in financial markets,” Gov. Andrew Bailey said. Next, traders will be watching for comments from BOE’s chief economist Huw Pill, who is scheduled to speak later Tuesday.
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There remains uncertainty as to how the central bank and government will continue to respond to market volatility.
“We are reluctant to overestimate the moves in terms of investor confidence returning,” said Simon Harvey, head of currency analysis at Monex Europe, adding that there were signs of profit-taking on positions.
Traders are still pricing in a chance of an emergency rate hike within the week, although BOE officials said they would address market moves in their next scheduled rate decision in November.
Such a delay in policy response “makes sterling vulnerable,” said Chris Turner, a currency strategist at ING Groep NV, who says it’s likely the pound could retest its record low of $1.0350 next month. “UK markets will now be overly sensitive to any communication from UK policymakers.”
(Updates with comments from M&G, ING.)
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