UK investors moved money from cash funds to bonds in June, drawn by attractive gilt yields, as the Bank of England's rate pause made bonds a compelling alternative to cash.
UK10Y yield offered attractive returns above 4%, prompting investors to rotate out of cash funds and into gilts. The increased demand for bonds is likely to push bond prices higher and yields lower in the near term.
High yields mean higher returns compared to cash funds, especially if investors expect yields to decline, which would generate capital gains on top of the income.
Increased buying pressure could push the 10-year yield lower as bond prices rise, potentially compressing the yield towards 3.5% if the trend persists.
Similar rotations have preceded Bank of England rate cut cycles, with bonds rallying as the cash rate becomes less attractive.
High yields on UK government bonds prompted investors to rotate out of low-return cash funds and into gilts last month. The shift reflects a broader hunt for yield as the Bank of England holds rates steady. Flows into bond funds accelerated, signaling a potential peak in cash holdings and a rebound in demand for fixed-income assets.
Attractive yields on UK government bonds, with the 10-year gilt offering over 4%, made bonds more appealing than cash funds as the Bank of England paused rate hikes.
The inflows could support bond prices and push yields lower, potentially easing financing conditions in the UK economy.
If the BoE signals rate cuts, cash yields will drift lower, reinforcing the appeal of longer-duration bonds.