Gilts Fall for Second Day Before Inflation Report; Pound Weakens

U.K. government bonds fell for a second day before a report that economists said will show consumer-price inflation accelerated last month, damping speculation of more stimulus by the Bank of England.

The declines pushed the 10-year gilt yield up by the most in a week. The annual inflation rate climbed to 2.6 percent in May from 2.4 percent in April, the Office for National Statistics in London will say today, according to the median prediction of 36 economists in a Bloomberg News survey. The pound fell from near its strongest level in more than four months against the dollar.

“We’ve seen data surprises on the upside,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Consequently expectations of further quantitative easing have been pared back significantly and that’s been reflected” in higher gilt yields, he said.

Benchmark 10-year gilt yields rose five basis points, or 0.05 percentage point, to 2.12 percent at 9:02 a.m. London time, after increasing two basis points yesterday. The 1.75 percent bond due September 2022 fell 0.365, or 3.65 pounds per 1,000-pound ($1,570) face amount, to 96.905. The 30-year yield climbed three basis points to 3.44 percent.

The U.K. 10-year break-even rate, a gauge of market inflation expectations derived from the yield difference between regular and index-linked bonds, added three basis points to 2.97 percent. It fell to 2.90 percent on June 11, the lowest level since Jan. 10.

Gilts Loss

Gilts handed investors a loss of 1.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 0.7 percent and Treasuries declined 1.1 percent, the indexes show.

The pound fell 0.2 percent to $1.5696, after climbing to $1.5752 yesterday, the highest since Feb. 11. Sterling weakened 0.3 percent to 85.25 pence per euro.

The pound has strengthened 4.2 percent in the past three months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 3.5 percent and the dollar dropped 0.2 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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