Gilts Rise, Pound Fluctuates as Housing Data Curbs Bets Rates May Increase

U.K. government bonds rose after a report showed British house prices fell more than estimated last month, indicating the economic recovery may not be strong enough to withstand an increase in interest rates.

The Halifax House Price Index fell 0.9 percent last month, more than the 0.5 percent drop forecast in a Bloomberg survey, the mortgage unit of Lloyds Banking Group Plc said in London today. The pound fluctuated before weakening against the dollar after U.S. employers added 192,000 workers in February, lower than the 196,000 forecast in a Bloomberg survey, according to Labor Department figures in Washington.

“Today’s rally in gilts has been in part due to the weak economic data we had earlier,” said Don Smith, a fixed-income strategist at ICAP Plc, the world’s largest broker of transactions between banks. “The Bank of England’s concern is that there’s general underlying weakness in the economy and the data seems to be bearing that out. They probably won’t look to raise rates until they’re comfortable that underling growth will be okay.”

Ten-year gilt yields dropped nine basis points to 3.63 percent as of 5:51 p.m. in London. The 4.75 percent bond due March 2020 rose 0.69, or 6.9 pounds per 1,000-pound ($1,625) face amount, to 108.55. The yield was 3.62 percent a week ago. Yields on two-year notes declined five basis points today to 1.39 percent.

Two-year gilts, typically more sensitive to interest-rate expectations, have fallen for six straight months on bets rates in the U.K. will need to rise to curb an inflation rate that’s almost twice the government target. Policy maker Andrew Sentance has led calls for the central bank to increase borrowing costs since June and last month voted for a 50 basis-point increase.

Short Sterling

Minutes from the bank’s Feb. 10 meeting showed Spencer Dale joined Sentance and Martin Weale in voting for higher borrowing costs, though they favored a 25 basis-point rise. Policy makers are expected to leave the main rate unchanged at 0.5 percent when they announce their next decision on March 10, according to the median estimate of 61 analysts polled by Bloomberg.

Short-sterling futures rose, reducing the implied yield on the contract expiring in December by seven basis points to 1.61 percent. A lower yield shows investors reduced bets the Bank of England will raise borrowing costs.

“Worse-than-expected economic data would persuade the BOE to be less hawkish on rates,” said Wilson Chin, a senior interest-rates strategist in London at HSBC Holdings Plc, Europe’s biggest bank by market value.

Rate Bets

Money markets are factoring in a 50 basis-point increase in the central bank’s main rate by year-end, according to sterling overnight index average forwards, Tullett Prebon Plc data show. So-called Sonia rates indicate the first 25 basis-point raise will happen in June.

Investec Plc expects the Bank of England to raise interest rates by 25 basis points in August, followed by another 25 basis-point increase in November, the brokerage said on March 2. The company had previously predicted that the first rate increase would be in November, it said.

The pound weakened 0.2 percent to $1.6247, trimming its gain for the week to 0.9 percent. Sterling fell for a third day against the euro, weakening 0.3 percent to 86.07 pence, the weakest level since Jan. 31.

Gilts have returned minus 1.9 percent this year, compared with 7.6 percent in 2010, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That compares with a negative 2.3 percent for Germany and minus 0.7 percent for the U.S., the indexes show.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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