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Gilts Drop an Eighth Day as Inflation Stays at Fastest Since May

U.K. government bonds fell for an eighth day after a government report showed inflation stayed at the fastest since May, weakening the case for more central bank asset purchases.

Benchmark 10-year yields climbed to the highest level in three months before Bank of England policy makers release tomorrow the minutes of their December meeting, when they kept their bond-buying program on hold. Gilt yields are forecast to keep increasing, according to economists surveyed by Bloomberg News. The pound rose to an 11-week high versus the dollar.

“The general consensus is that inflation will remain sticky,” said Michael Hewson, a market analyst at CMC Markets Plc in London. “If inflation stays high, then there could be upward pressure on gilt yields because it would suggest that the Bank of England would be very reluctant to print more money.”

The 10-year yield climbed seven basis points, or 0.07 percentage point, to 1.96 percent at 4:33 p.m. London time after reaching 1.97 percent, the highest level since Sept. 17. The 1.75 percent bond due in September 2022 dropped 0.61, or 6.10 pounds per 1,000-pound ($1,626) face amount, to 98.15.

Benchmark yields may rise as high as 2.20 percent in the next two months if they climb above the peak of 1.99 percent reached on Sept. 17, CMC Markets’s Hewson said. Yields will increase to 1.98 percent by the end of March, according to the median estimate of 22 economists surveyed by Bloomberg News.

Inflation Data

Consumer prices rose 2.7 percent last month from a year earlier, the same as in October, the Office for National Statistics said in London. A separate report showed producer prices unexpectedly declined 0.2 percent in November.

Investors boosted their inflation expectations to the most in eight months today, bond trading shows.

The 10-year break-even rate, a measure of expectations of inflation derived from a difference in yield between regular and index-linked bonds, was at 2.76 percentage points, after rising to 2.79 percentage points, the most since April 19.

Bank of England Chief Economist Spencer Dale raised concerns last week that inflation may show “stickiness,” complicating the task of policy makers seeking to stimulate the economy with price growth above their 2 percent goal.

The Bank of England forecast last month that inflation will be at about 1.8 percent in the final quarter of 2014, and said risks to the forecast for it to reach the target in the medium term are “broadly balanced.”

Bond Purchases

Bank of England officials kept the central bank’s asset-purchase target at 375 billion pounds and the key interest rate at a record low of 0.5 percent at their Dec. 6 meeting.

U.K. gilts handed investors a loss of 1.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.2 percent and Treasuries declined 0.6 percent.

The pound rose 0.4 percent to $1.6261 after climbing to $1.6269, the strongest level since Sept. 28. The U.K. currency weakened 0.1 percent to 81.32 pence per euro.

Sterling has appreciated 1.6 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.2 percent and the dollar fell 3.4 percent.

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