Bonds: Credit Suisse thinks markets underpricing medium-term rise in Bank Rate

These were the movements in the yields of the most widely followed long-term sovereign bonds:

US: 2.25% (+3bp)

UK: 1.95% (+1bp)

Germany: 0.69% (-0bp)

France: 0.98% (+0bp)

Spain: 1.91% (-2bp)

Italy: 1.88% (-2bp)

Greece: 11.91% (+17bp)

Portugal: 2.52% (-1bp)

Markets took a breather on Tuesday, with investors understandably more than willing to wait for the Fed’s policy announcement on 29 July before deciding on their next move, although the analyst community did seem to be taking increasing notice of the continuing rout in global commodities.

Against that backdrop, the yield on the benchmark 10-year Gilt edged higher, tracking a similar movement in similar maturity US Treasuries.

Worth keeping in mind, US Treasuries had rung up gains of 1% month-to-date by Tuesday, their best monthly tally since January according to data from Bloomberg.

Judging by the flow of market commentary, analysts appeared to be increasingly cautious regarding the probability of a September Fed hike – which might weigh on the MPC’s deliberations.

That wariness however was not unanimous. Credit Suisse’s Andrew Garthwaite, for one, told clients markets were underpricing both the short-term and medium-term upside for Bank Rate.

“We think interest rates could rise more than expected in the medium term (1.6% is priced in for end 2017) due to the fact that the UK consumer is now less rate sensitive there is a high chance of fiscal policy slippage,” Garthwaite said.

The strategist put the odds of a first hike in Bank Rate occurring in February 2016 at 80%. “If anything, the chances are higher, in our view,” he added.

An ‘in-line’ advanced estimate on second quarter UK gross domestic product which revealed a quarterly rate of growth of 0.7% was dismissed by economists at Barclays.

They wrote to clients to say: “We also highlight that the ONS National Account release can be materially revised even after the release of the final estimate. Hence, we would not recommend drawing excessively strong conclusions from today’s release.”

No change in stance was expected from the US central bank, but some sort of indication that a September rate hike might be in the offing was thought possible by some observers.

Not so according to Bill Hubard, chief economist at Bankor, who pointed out how in previous meetings the Fed had indicated it did not want markets to become too complacent if it were to flag up possible moves in rates too far in advance, especially so for the first hike.

The minutes of the April FOMC showed that “most participants” had decided that: “the timing of the first increase in the target range for the federal funds rate would appropriately be determined on a meeting-by-meeting basis and would depend on the evolution of economic conditions and the outlook,” Hubard explained.

Lastly, and acting as a backdrop, the European Union and International Monetary Fund mission chiefs were set to arrive in Athens on Wednesday to kick off talks on a third bailout.

Ahead of those negotiations, Mina Andreeva, the spokeswoman for the European Commission said that “more reforms are expected from the Greek authorities, to allow for a swift disbursement [of rescue funds from the ESM].”