2 Bank of England rate hikes are priced into markets for June 2027. TS Lombard says that market assumption overstates U.K. resilience and opens a buying window in 10-year gilts. Daniel von Ahlen, head of macro strategy at TS Lombard, published the note on Wednesday and recommends gilts over equivalent-duration U.S. Treasurys, German bunds and Japanese government bonds. If incoming wage and price data stay soft, gilt yields could move lower relative to peers.
2 Bank of England hikes priced for June 2027 are the single market-implied figure driving TS Lombard's call, and that number is the read the firm wants investors to start from. Markets have shifted to price almost two additional BoE increases by that date, a setup that normally pushes yields higher. TS Lombard argues the setup is too hawkish given evolving domestic data and survey evidence.
Why TS Lombard thinks the market is wrong
Daniel von Ahlen lays out three load-bearing facts. First, wage growth has slowed sharply and returned to roughly pre-pandemic levels. Second, the Bank of England's agents survey shows firms' pricing plans have been effectively unchanged since the Iran conflict raised costs earlier this year. Third, inflation expectations have eased across multiple measures.
Taken together, those indicators point to a negative output gap, soft real income growth and a labor market von Ahlen calls "in the doldrums." That combination weakens the case for sustained above-target services inflation, reducing the need for further aggressive BoE tightening in TS Lombard's view.
The firm makes a direct policy call. "We still think the BoE can cut rates next year," von Ahlen says. That's the counterweight to a market pricing almost two more hikes into June 2027, and it's the basis for recommending 10-year gilts to investors who currently overweight other sovereign bonds.
Why gilts over peers
TS Lombard frames the trade as relative value across sovereign markets. It expects less room for German bund yields to fall because the European Central Bank is likely to raise rates further amid accelerating wage growth in the euro area. It also sees Japanese wage dynamics supporting stickier services inflation and higher JGB yields in coming years.
By contrast, the U.K. picture looks weaker on wage momentum and business pricing intentions. That difference, von Ahlen argues, means gilt yields have more scope to fall if incoming data confirm the softening trend. For investors seeking duration at comparable maturities, TS Lombard prefers 10-year British gilts to equivalent-duration U.S. Treasurys, German bunds and Japanese government bonds.
The practical effect for households and businesses is part of the thesis. Slower pay growth, returned to about pre-COVID levels, limits upside for household incomes.
Firms not passing through higher costs aggressively, according to the agents survey, reduces second-round inflation risks. Together those dynamics support TS Lombard's view that the market has overstated the Bank of England's need to tighten further.
Von Ahlen's recommendation rests on data rather than sentiment. If wage growth and firms' pricing plans keep weakening and inflation expectations stay lower, the market-implied two hikes by June 2027 look avoidable and gilt yields should fall relative to peers. If instead wages and prices reaccelerate, the market pricing will look more justified.
Related Articles
- BOE holds rates at 3.75% as officials flag possible hikes
- BOE Holds at 3.75%, Warns of Inflation Risk
- Bank of England Holds Rates at 3.75%, MPC Votes 8-1
Markets have priced almost two further Bank of England moves by June 2027. Watch incoming wage and price prints and the BoE's policy updates; if pay growth and firms' pricing intentions remain soft, gilt yields could fall versus peers, backing TS Lombard's recommendation. Originally reported by Morningstar.
This article was created with AI assistance.
