U.K. Bonds Fall as BOE’s Weale Sees Rate Increase in Early 2015

U.K. government bonds declined, with two-year gilts falling for the first time in six days, as Bank of England policy maker Martin Weale said interest rates may rise as soon as early 2015.

Ten-year gilts snapped a three-day advance as the U.K. Debt Management Office sold 3 billion pounds ($5 billion) of the benchmark securities. Weale said in a Sky News television interview that the path for interest rates “is likely to be relatively gradual.” Short-sterling futures fell as traders added to bets on higher interbank borrowing costs. The pound was little changed.

“We’re trading lower on the back of it considering the first rate hike wasn’t priced in until May,” said Jason Simpson, a U.K. rates strategist at Banco Santander SA in London, referring to Weale’s comments. “It’s hit the whole curve out to the 10 year. The auction was OK but this has been the focal point.”

The two-year yield climbed three basis points, or 0.03 percentage point, to 0.52 percent at 4:29 p.m. London time. The rate dropped six basis points in the previous five days. The 4.75 percent gilt due in September 2015 fell 0.065, or 65 pence per 1,000-pound face amount, to 106.48.

Ten-year yields jumped seven basis points to 2.80 percent, the biggest increase since Feb. 12.

The U.K. debt office allotted the benchmark securities at an average yield of 2.73 percent, compared with 2.87 percent at a previous sale on Jan. 23.

The implied yield on short-sterling contracts expiring in March 2015 increased five basis points to 0.95 percent.

Rate Bets

Weale’s comments came after Bank of England Chief Economist Spencer Dale said Feb. 13 investor bets for the central bank’s key interest to increase next year from a record low were reasonable.

Minutes of the Bank of England’s Feb. 5-6 meeting published yesterday showed officials were unanimous on the need to keep borrowing costs unchanged at a record-low 0.5 percent.

The pound traded at $1.6658 after declining as much as 0.3 percent to $1.6636. The U.K. currency was at 82.27 pence per euro from 82.34 pence yesterday.

A gauge of future price swings for the pound against the dollar rose for the first time in four days. One-month implied volatility for the pound against the dollar rose 16 basis points to 7.34 percent, after dropping to 7.19 percent yesterday, the lowest since Feb. 12, based on closing prices.

A report tomorrow will show U.K. retail sales including auto fuel dropped 1 percent last month, after rising 2.6 percent in December, according to the median forecast of analysts in a Bloomberg News survey.

Data Confusion

“There’s a bit of confusion in terms of how to interpret the data,” said Kiran Kowshik, a currency strategist at BNP Paribas SA in London. “The market is looking at the minutes and seeing there was no dissent. That’s subdued sterling a little bit. The softening into the beginning of March will give you a good opportunity to buy sterling.”

The pound gained 13 percent in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, on signs quickening growth would prompt the central bank to raise interest rates. The euro strengthened 6 percent and the dollar rose 2.3 percent.

U.K. gilts returned 2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities also earned 2 percent and U.S. Treasuries gained 1.6 percent.

To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net

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

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