GBP spreads are on the rise, with 5-year spreads increasing by nearly 10 basis points since the beginning of the year. This trend is driven by positive fiscal and monetary policies, as the market anticipates one or two more rate cuts from the Bank of England.
As a result, GBP spreads have decreased compared to USD spreads, since global rates are narrowing. Supportive net issuance is expected until the end of the financial year 2025/26, and a further drop in supply is anticipated for 2026/27.
Market Expectations For Rate Cuts
Recent data has become less significant, but it still keeps market expectations alive for potential rate cuts from the Bank of England. This is different from other central banks, which are leaning toward holding rates or even increasing them.
GBP spreads continue to tighten, and the 5-year segment of the curve has seen almost a 10-basis point reduction since the start of the year. This shift is fueled by a unique blend of favorable government spending and monetary policy. The market is ready for this trend to go on.
There is a strong belief in the possibility of one or two more rate cuts from the Bank of England. Currently, overnight index swaps show an 85% chance of a 25-basis point cut at the March 2026 meeting, especially after December 2025’s inflation reading came in at a lower-than-expected 2.8%. This is a contrast to the stubborn inflation that concerned us throughout much of 2025.
Gilt Supply And US Policy Divergence
The availability of UK government bonds, known as gilts, is also benefiting prices. The UK’s Debt Management Office has confirmed that gilt issuance for the upcoming fiscal year will drop to £210 billion, down from £235 billion last year. This reduction naturally increases the demand for existing bonds.
The situation in the UK contrasts sharply with the United States. In January, the Federal Reserve indicated they would keep rates steady, citing ongoing wage growth in the US. This difference in policies makes UK rates relatively attractive.
For derivative traders, this suggests setting up trades that profit from UK rates falling faster than US rates. We should think about taking long positions in 5-year Gilt futures, which represent the richest end of the curve. This could be paired with a short position in 5-year US Treasury Note futures to take advantage of the widening policy gap between the two central banks.
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