Feeling Gilty ?

The Bank of England could surprise markets by lowering its inflation projection for 2017 and that will be positive for gilts, according to Mike Riddell, a U.K. fixed-income portfolio manager at Allianz Global Investors.

This would go against the consensus in a survey for Thursday’s Inflation Report, where only economists from NatWest Markets and Intesa Sanpaolo among the 20 polled agree with Riddell. Of the rest, five see the BOE keeping its inflation outlook unchanged for this year and 13 see it upgrading the forecast. Oil prices have fallen and sterling has moved higher since the BOE’s last report in February, supporting his case.

“The market seems to be expecting a hawkish rhetoric from the Bank of England and I expect it’s more likely we see the opposite,” said London-based Riddell, whose firm manages 480 billion euros ($522 billion). He said on Wednesday he did “actually go a bit long again” on gilts, as they now offer “better value.”

Gilts have traded in a narrow range this year, amid uncertainty over the country’s exit from the European Union and the potential response from the central bank as U.K. economic data takes a turn for the worse. Ross Walker, head of European economics at NatWest, is another who sees a “fractionally lower” outlook for prices because of slower GDP growth, a stronger pound and muted wage inflation.

With U.K. snap elections less than a month away on June 8, it is unlikely the BOE will want to surprise the markets, said John Wraith, head of U.K. macro rates and strategy at UBS Group AG in London, but he agrees it will refrain from lifting inflation projections for 2017.

Riddell said he had changed his view on gilts from a month ago, largely linked to the BOE meeting, where he sees it also announcing a downward revision to its growth forecast. The yield on 10-year gilts rose two basis points on Thursday to 1.19 percent, after reaching its highest since March on Tuesday.

“If we get to 1.10 percent I will probably start fading it again,” Riddell said. “My biggest concern for bond markets and why I am not super long and super bullish is that the Fed is clearly very keen to hike rates and this is not yet fully priced in by the markets.”


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