U.K. Bonds Lift U.S. Bonds

The U.S. Treasury market is being helped today by a rally in the U.K. bond market, which is being fueled in part by the realization that future interest rate hikes are now fully priced in.

Rates on 90-day sterling futures, which carry an open interest of 2.8 million contracts, are down as much as 6 basis points, reflecting the perception that rate hikes beyond the rate hike expected from the Bank of England on June 6 are not baked in the cake.

This is despite the release today of minutes from the Bank of England's April 4 policy meeting, which indicated that the BOE was poised to raise its benchmark rate by 25 basis points to 5.50% in response to new inflation data released yesterday indicating that inflation reached a 10-year high in March.

If the BOE does in fact raise interest rates by a quarter-point, its benchmark rate would be above the Federal Reserve's benchmark rate, the fed funds rate. For today, though, the sharp drop in U.K. rates is impacting Treasuries. This should not surprise given that more of the world's dollars are deposited in the U.K. than in the U.S.

The Treasury market is also being helped by today's weaker data on mortgage applications as well as the sense that the April economy will be hampered by unusual weather conditions, which will make the month of May easier to navigate.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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