UK bonds, stocks soar as BoE holds rates steady

Yields on Gilts dropped to 4.318 per cent and were last 12 bps down on the day at 4.381 per cent, down nearly 2 bps from before the BoE decision

British bonds were on track for their best day in over a month on Thursday and stocks climbed after the Bank of England held interest rates steady for a second successive meeting.

Bonds and stocks were already trading higher after the US Fed kept interest rates on hold on Wednesday, with the Bank of England decision adding to a feeling among investors that the next move in borrowing costs will be lower.

Yields on benchmark 10-year UK bonds, known as Gilts, dropped to 4.318 per cent and were last 12 bps down on the day at 4.381 per cent, down nearly 2 basis points from before the Bank of England decision.

The decline put the yield on track for its biggest one-day drop since mid-September. Yields drop as prices increase and vice versa.

The BoE left borrowing costs unchanged at 5.25 per cent and published forecasts which showed the British economy was likely to skirt close to a recession and flat-line in the coming years.

A decline in global bond yields boosted stocks, with Britain's FTSE 100 stock index last up 1.54 per cent. The index was 1.2 per cent up prior to the Bank of England decision.

Smaller firms, which are more sensitive to changes in borrowing rates, outperformed their larger peers, with the UK's FTSE 250 index up 3.15 per cent.

The news over the last day, from both the Fed and the BoE, suggests that we are done with rate hikes, and that decreases are the next item on the agenda, said Michael Field, the Europe market strategist at Morningstar. With this in mind, bond markets once again adjusted.

Yet Field said Thursday's rally in bonds only went some way to undoing the sharp sell-off that has pushed yields to near their highest level in decades.

The BoE's Monetary Policy Committee (MPC) voted 6-3 to keep the Bank Rate on hold, in line with economists' expectations in a Reuters poll.

Sterling jumped following the decision but later gave up some gains and was last up 0.24 per cent at $1.2179, as the drop in U.S. yields was weighing on the dollar. It traded nearly 0.35 per cent higher before the decision.

Traders in derivatives markets on Thursday briefly moved to fully price in a BoE rate cut in August 2024, although later moved that bet back slightly. They see two rate cuts by the end of 2024, as per LSEG data.

Britain's 2-year gilt yield traded 7 basis points lower at 4.723 per cent, after reaching its lowest level since June this year at 4.655 per cent after the BoE announcement.