(Bloomberg) — Interest in UK government bond futures is booming, as this year’s volatility attracts risk seekers back to the market.
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The number of outstanding contracts in gilt futures has almost tripled over the past two years, rising to 987,000 as of Tuesday, according to data from Intercontinental Exchange Inc. So-called open interest last exceeded 1 million contracts in 2018, according to ICE.
Market turbulence has played a major role in the surging demand, with Chancellor of the Exchequer Rachel Reeves’s borrowing plans sparking jitters over the UK’s debt sustainability. Those concerns sent 30-year gilt yields soaring to the highest since 1998 last month.
Borrowing costs have since retreated as investors sought refuge from shockwaves in equity markets caused by a Chinese challenge to US tech dominance in artificial intelligence. Demand for bonds increased further as US President Donald Trump’s import-tariff plans pummeled stocks once more.
“The near-record open interest in ICE’s gilts offering is a clear indicator of the return of confidence in the UK gilt market,” said Caterina Caramaschi, vice president, Financial Derivatives at ICE. “These market conditions mean gilt futures and options have become a useful tool to express views on monetary policy decisions.”
An initial rush into the futures contracts in 2023 coincided with aggressive Bank of England interest-rate hikes to rein in double-digit inflation. Buying continued as traders placed wagers on when policymakers would begin to ease monetary policy.
Rate-setters eventually delivered two quarter-point reductions last year, significantly fewer than peak expectations for six cuts. For this year, swaps imply between three and four reductions, starting with a quarter-point cut to 4.5% from the BOE on Thursday.
Between the lows they set in September last year, their ascent to last month’s peak, and their subsequent retreat, UK 10-year bond yields have swung over 165 basis points. That’s 15 basis points more than their US counterparts and far greater than the one-percentage-point traveled by their German peers.
(Updates with more commentary from ICE in the fifth paragraph)
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