Insights 
VT 
Shocks From Abroad
Catherine Mann from the Monetary Policy Committee at the Bank of England spoke in Washington, DC. She discussed the influence of US policy on volatility in UK assets.
She noted that the 10-year gilt in the UK is greatly affected by the spillover effects from the US. Mann mentioned that Quantitative Tightening (QT) might mitigate some effects of Bank of England rate cuts on long-term bonds.
For further details, Mann’s full speech is available on the Bank of England’s website.
Mann’s remarks make clear that shocks originating from abroad, particularly from the United States, continue to ripple through UK markets. She made the connection that domestic bond yields, especially those on the longer end, are often reacting less to domestic announcements and more to decisions being made across the Atlantic. That is to say, UK gilts are not fully insulated—they are responding in real time to interest rate expectations set by the Federal Reserve, along with changes in demand for longer-maturity debt driven by global funds reallocating exposure.
There was a further point made about QT. Mann suggested that ongoing asset sales from the Bank of England’s balance sheet could counteract the usual drop in long-term bond yields that follows policy rate reductions. This implies that even if we move towards looser monetary policy, the expected compression in long-dated gilt yields may not materialise to the same degree. The ongoing runoff of the balance sheet could keep longer rates from falling too far, too fast.
This has immediate meaning for trading on the long end of the curve. We must consider both the rate path decided in London, and the asset supply dynamics dictated by the BoE’s QT schedule. The two are pulling in opposite directions, and that tension won’t vanish soon. Adding complexity, signs of resilience in the US economy have already led to stickier inflation expectations, which keeps upward pressure on global yields.
Market Implications
Movements in sterling interest rate derivatives may not always be reflective of local demand or domestic inflation trends. Sometimes the flows are dictated by fund hedging strategies out of Europe or the US—rebalancing portfolios in response to rate movements abroad. Mann essentially flagged that dependency. That indirect exposure, through portfolio channel effects, challenges efforts to understand pricing dynamics solely through a local frame.
For now, it would be useful to monitor cross-market spreads closely, particularly the gilt-Treasury basis at longer maturities. Mann’s comments suggest this could deviate more than usual if QT effects remain strong here but ease elsewhere. Directional bets must capture that asymmetry head-on, lest one side of the book remains misaligned with duration risk.
We also need to factor in that policymakers might be less aggressive with rate cuts if they believe balance sheet runoff is exerting a tightening influence of its own. In that context, rate forwards could be too low if they assume the policy rate path operates in isolation from asset purchases. And on the flip side, any hints that QT will slow could nudge the long end closer to pricing in cuts more fully—though the magnitude would depend on timing and the messaging.
As volatility filters through secondary effects, we’ll need to approach positioning with a view towards liquidity conditions and responsiveness to global cues, rather than local policy alone. Some of the usual correlations may not hold as firmly this summer. Timing those dislocations will be vital across interest rate tools.
