The yield difference between U.K. two- and 30-year government bonds shrank to the least in five years as comments by the Bank of England’s David Miles fueled bets policy makers are moving closer to raising interest rates.
The two-year gilt yield reached the highest since 2011 after Miles, an external member of the central bank’s Monetary Policy Committee, hinted that minutes of its June 5 meeting, due tomorrow, will show a move toward increasing rates, according to the London-based Times newspaper. The securities pared their drop after U.K. inflation slid to its lowest rate in 4 1/2 years in May. The pound fell after climbing to the most in almost five years versus the dollar yesterday.
“There’s huge event risk tomorrow with the MPC minutes,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Miles, the most consistent dove on the MPC is now openly discussing the prospect of what he calls a benign opportunity to start hiking rates. I do think there is more underperformance to come at the very short end of the gilt curve.”
The two-year yield rose one basis point, or 0.01 percentage point, to 0.91 percent at 4:11 p.m. London time, after reaching 0.93 percent, the highest since June 2011. The 2 percent gilt due in January 2016 fell 0.025, or 25 pence per 1,000-pound ($1,696) face amount, to 101.715. The rate climbed 19 basis points over the previous three days.
The prospect of higher interest rates is prompting investors to sell shorter-dated government debt securities, resulting in a flattening of the yield curve, which is a chart showing rates on bonds of different maturities.
Shorter-maturity debt tends to track what the Bank of England does with its benchmark rate, while longer-dated securities are more influenced by the outlook for inflation. Governor Mark Carney said on June 12 that borrowing costs may rise sooner than economists expect.
Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will increase 25 basis points by January, versus May before Carney’s speech last week. The Bank of England’s main interest rate has been at a record-low 0.5 percent since March 2009.
Miles said he was more confident about prospects to the stage where he now thinks he will vote for a rate increase before he steps down in May, according to the Times newspaper, citing an interview.
The 30-year yield was little changed at 3.46 percent, making the extra yield that investors get for holding the longer-dated gilts instead of two-year securities 255 basis points, the tightest since January 2009, based on closing-price data compiled by Bloomberg.
Consumer prices rose 1.5 percent in the 12 months through May, the least since October 2009, the Office for National Statistics said. That’s down from 1.8 percent in April and compared with a median forecast of 1.7 percent in a Bloomberg News survey of analysts. Inflation has been at or below the central bank’s 2 percent target for six months, the longest stretch since 2009.
The pound declined 0.1 percent to $1.6964 after climbing to $1.7011 yesterday, the highest since Aug. 6, 2009. Sterling appreciated 0.1 percent to 79.82 pence per euro after reaching 79.59 pence yesterday, the strongest level since Oct. 1, 2012.
“The market has been fixated on the shift in tone from governor Carney and some comments from the usually dovish Miles overnight,” said Daragh Maher, currency strategist at HSBC Holdings Plc in London. “But the inflation data has surprised on the downside this morning suggesting the BOE has a little bit more room to wait before hiking. The pound is understandably lower as a result.”
The pound strengthened 9 percent in the past year, the best performer after the New Zealand dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 1.6 percent and the dollar rose 0.2 percent.
The Debt Management Office said today it plans to sell 3.5 percent gilts due in January 2045 via banks. The sale will take place the week starting June 23, subject to market conditions, the debt office said in a statement on its website.
The U.K. last auctioned 30-year debt on April 2 at an average yield of 3.528 percent.
Gilts returned 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.8 percent and German securities gained 4.2 percent.
To contact the reporter on this story: Lucy Meakin in London at email@example.com