Recently, the UK financial market has experienced violent fluctuations, with soaring bond yields and the devaluation of the pound becoming the focus of the market.Mike Riddell, a fund manager at Fidelity International, believes the sell-off in the UK bond market has created value for investors, especially the market's underestimation of expectations of a rate cut by the Bank of England.Fidelity International, as the world's fourth largest asset manager, manages more than US$926 billion in assets, and its views have important influence in the market.

Riddell pointed out that the sharp rise in UK government bond yields was not entirely based on the fundamentals of the UK economy, but was influenced by the "blind follow-up" of selling in the US government bond market.In early January, the yield on British 10-year government bonds soared to 4.92%, the highest level since 2008, while the yield on 30-year government bonds also hit a high since 1998.The market turmoil reflects investor concerns about the UK's high debt levels, stubborn inflation and sluggish economic growth.

However, Riddell believes the market's expectations for the Bank of England to cut interest rates are biased.At the beginning of the year, the market expected the Bank of England to cut interest rates only twice, while Riddell expects three to four rates this year.This gap in expectations provides an opportunity for investors to bet that interest rates will fall by adding long positions in 2-year swap contracts and 10-year Treasurys futures.

The current state of the UK economy has further exacerbated market uncertainty.Since 2024, the UK's economic growth has stalled, but inflation has continued to rise.Between September and November, inflation rose from 1.7% to 2.6%, while economic growth shrank for two consecutive months.In addition, the British government's fiscal policy has also caused market concerns.The Labor government's expansionary fiscal plan may lead to a "crowding out" of private investment, further dampening economic growth.

In this context, the British pound exchange rate is also under tremendous pressure.Although rising British government bond yields usually enhance the attractiveness of the pound, market pessimism about the UK's economic outlook has led to a devaluation of the pound.The pound has fallen 2.5% against the dollar since the beginning of the year, and the market expects it to weaken further.According to the latest survey by Bloomberg Markets Live Pulse, more than half of market participants expect the pound to fall to between $1.20 and $1.15 by the end of June.The options market also showed strong demand for sterling put options, with strike prices concentrated between 1.20 and 1.15, reflecting investors 'expectations of a devaluation of the pound.

Riddell hedged his long position in British government bonds by shorting the pound, and believes that even if bond yields rise again, the pound may continue to depreciate.This strategy reflects his concerns about the UK's fiscal health and expectations for market volatility.Although the Bank of England may cut interest rates to stimulate the economy, concerns about Britain's fiscal discipline remain.

In addition, the Bank of England's policy path is also full of uncertainty.Although inflation has eased, markets remain divided on expectations for the Bank of England to cut interest rates.The Bank of England will cut interest rates by 25 basis points in August and November 2024 respectively, but the extent and frequency of future interest rate cuts still need to depend on economic data.Meanwhile, the UK Treasury plans to sell about £ 300 billion in bonds over the next year to cover the budget deficit, a plan that could further fuel market concerns about the UK's fiscal health.