Gilts Decline for Seventh Day Before U.K. Consumer-Price Report

U.K. government bonds fell, with 10- year gilts sliding for a seventh day, before a government report tomorrow that economists said will show consumer-price inflation remained at the fastest since May.

Ten-year yields climbed to the highest level in six weeks even as an industry report today showed U.K. house prices declined in December, damping optimism the economy is recovering. Gilts have declined this month as the Bank of England decided to keep on hold its program of bond purchases, known as quantitative easing. The pound strengthened to a two- month high against the dollar.

“The overall trend for gilts is pretty bearish,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “The inflation picture is somewhat murky at the moment. Quantitative easing has probably come to an end.”

The 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 1.89 percent at 4:41 p.m. in London, the highest level since Nov. 2. The 1.75 percent bond due in September 2022 dropped 0.265, or 2.65 pounds per 1,000-pound ($1,620) face amount, to 98.74.

Investors are boosting their forecasts for U.K. inflation, bond yields show.

The 10-year break-even rate, a measure of expectations of inflation derived from a difference in yield between regular and index-linked bonds, widened one basis point to 2.78 percentage points, the most since April 19.

Consumer Prices

Consumer prices rose 2.7 percent last month from a year earlier, matching the October reading, the Office for National Statistics will say tomorrow, according to the median estimate of 34 economists surveyed by Bloomberg News. Faster inflation erodes the purchasing power of the fixed income from bonds.

Average house prices in England and Wales fell 3.3 percent, the most since January 2002, Rightmove Plc said. London home sellers cut asking prices 4 percent from November, the property website said.

Gilts handed investors a loss of 1 percent this month through Dec. 14, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.4 percent and Treasuries declined 0.3 percent.

Bank of England officials in two days will release the minutes of their Dec. 6 meeting, when they maintained the central bank’s asset-purchase target at 375 billion pounds and the key interest rate at a record low of 0.5 percent.

Credit Rating

Standard & Poor’s lowered its outlook on Britain’s AAA credit rating to negative last week, meaning there is a one-in- three chance that it may be cut in the next two years.

Deputy Prime Minister Nick Clegg said Britain is not “dancing to the tune” of credit-rating companies.

“I don’t think the decision of each and every credit rating agency is the be-all and end-all,” he said after a speech in London. “We’re not dancing to the tune of the credit- rating agencies. We’re seeking to do the right thing for the British people.”

The pound strengthened 0.2 percent to $1.6202 after rising to $1.6216, the highest since Oct. 5. Sterling appreciated 0.1 percent to 81.28 pence per euro.

The U.K. currency has gained 1.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.4 percent and the dollar fell 3.2 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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