Forget Brexit, trade the BoE's upcoming rate war - Bloomberg

As noted by Bloomberg, the head of Columbia's Threadneedle, Ed Al-Hussainy sees no way to successfully trade UK Prime Minister Theresa May's current slow-motion Brexit crisis, and the only feasible solution is to adjust perspective on the UK and instead focus on the Bank of England (BoE), and its interest rate struggles.

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From Al-Hussainy’s perspective though, Carney will probably have to tighten policy and a yield spike could be on the way. The pullback in market pricing shows that traders are focused on the growth risk from Brexit, the Minneapolis-based analyst said, and that they’re underestimating the potential impact on inflation due to factors such as currency weakness, higher import costs and reduced immigration. 

“We have no base case -- we tried scenario analysis but it’s not working,” Al-Hussainy said of his team’s approach to trading Brexit. “The moment we start assigning probabilities, we’re going to be wrong. Our people in the U.K. are too close to what’s going on, and we in the States are too far away.”

Markets may have to readjust to the prospect of higher rates soon, said Al-Hussainy, as the BOE is unlikely to significantly downgrade its growth outlook in its next set of economic forecasts. He predicts that intermediate-maturity U.K. yields will rise relative to those in the U.S., because the BOE doesn’t have the same luxury of putting hikes on hold that the Fed has -- especially if the British currency continues to slide.

To complicate matters, Al-Hussainy said a no-deal Brexit could threaten the haven status of U.K. government debt. “There’s a real risk that if you have a nasty Brexit outcome, this luxury will start to disappear,” he said. “And investors will demand a higher compensation to hold gilts.”