GBP spreads are experiencing an upward trend across the curve, with 5-year spreads rising by nearly 10 basis points since the start of the year. This trend is influenced by favourable fiscal and monetary policies, with market expectations set for one to two additional rate cuts from the Bank of England.
This dynamic leads to a decrease in GBP spreads relative to USD spreads, as global rates enter narrow trading levels. Net issuance up to the end of the financial year 2025/26 is considered supportive, and a further decrease in supply is anticipated for 2026/27.
Market Expectations For Rate Cuts
Incoming data has become less of a priority, yet it maintains market expectations for potential rate cuts from the Bank of England. This contrasts with other central banks, where the shift is towards holding rates or possible hikes.
GBP spreads are continuing to richen, and we have seen the 5-year part of the curve tighten by almost 10 basis points since the start of the year. This move is being driven by a rare combination of favorable government spending plans and monetary policy. The market is positioned for this trend to continue.
We are seeing a strong expectation for one or two more rate cuts from the Bank of England. Overnight index swaps are currently pricing in an 85% probability of a 25 basis point cut at the March 2026 meeting, especially after the last inflation reading for December 2025 came in at a lower-than-expected 2.8%. This contrasts with the stubborn inflation we had to navigate for much of 2025.
Gilt Supply And US Policy Divergence
The supply of UK government bonds, or gilts, is also helping prices. The UK’s Debt Management Office recently confirmed that gilt issuance for the upcoming fiscal year will fall to £210 billion, a significant drop from the £235 billion issued in the prior year. This reduction in supply naturally makes existing bonds more sought after.
This situation in the UK is very different from what is happening in the United States. At their last meeting in January, the Federal Reserve signaled they would hold rates steady, pointing to persistent US wage growth. This divergence in policy makes UK rates look attractive on a relative basis.
For derivative traders, this points toward setting up trades that benefit from UK rates falling faster than US rates. We should consider long positions in 5-year Gilt futures, playing the richest part of the curve. This could be structured against a short position in 5-year US Treasury Note futures to capture the widening policy gap between the two central banks.
