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U.K. Inflation-Bond Yield Falls to Record

Jan. 15 (Bloomberg) -- U.K. index-linked bonds gained, with 10-year yields dropping to a record, after a report showed retail-price inflation unexpectedly accelerated last month.

The securities gained for a second day as investors sought protection from rising consumer prices that erode the fixed income from conventional bonds. The pound strengthened for the first time in eight days versus the euro after an index of house prices climbed to the most since June 2010. Sterling will weaken as demand for a haven from Europe’s debt crisis wanes and Britain’s economy languishes, according to Citigroup Inc.

“U.K. headline inflation does look sticky, more so than the case in the euro zone or the U.S.,” said Markus Heider, head of inflation research at Deutsche Bank AG in London. That’s supportive for “inflation bonds in the U.K.,” he said.

The yield on the 10-year inflation-linked bond fell four basis points, or 0.04 percentage point, to minus 1.01 percent at 5 p.m. London time after dropping to minus 1.05 percent, the lowest since Bloomberg started collecting the data in 1992. The 1.875 percent security due November 2022 gained 0.405, or 4.05 pounds per 1,000-pound ($1,608) face amount, to 129.975.

The yield on the 10-year gilt declined one basis point to 2.02 percent after falling to 1.98 percent, the lowest level since Jan. 3. Index-linked bonds pay investors based on changes in the retail-price index.

Quicker Inflation

Retail-price inflation increased to a 3.1 percent annual rate in December, from 3 percent in November, the Office for National Statistics said. Consumer prices climbed 2.7 percent in December from a year earlier, matching the readings in the previous two months, a separate report showed.

Yields on 10-year index-protected bonds climbed to the highest since July last week as officials considered changing the way they calculate the retail price index, stoking concern such a move would dent returns on gilt holdings. The Statistics Office said on Jan. 10 it will maintain its current formula.

The 10-year break-even rate, the difference in yield between gilts and index-linked securities, widened two basis points to 3.04 percent.

Gilts have handed investors a loss of 1.5 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds also dropped 1.5 percent and Treasuries declined 0.3 percent.

Pound Gains

The pound appreciated versus the euro after the Royal Institution of Chartered Surveyors said its house price gauge advanced to zero from minus 9 in November. That’s the first time since June 2010 the measure hasn’t been below zero.

Sterling gained 0.3 percent to 83.01 pence per euro after dropping to 83.26 pence yesterday, the weakest level since April 3. The pound was little changed at $1.6073.

The U.K. currency has declined 1.4 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro advanced 1.1 percent, while the dollar weakened 0.1 percent.

“The combined impact of reduced need for safe-haven euro proxies and diminishing attractiveness of the pound as a safe haven should continue to weigh on sterling,” Valentin Marinov, head of European Group of 10 currency strategy at Citigroup Inc. in London, wrote today in a note to clients. “Further underperformance of the U.K. economy could trigger a sovereign rating downgrade” and mean more central-bank stimulus, he said.

The National Institute of Economic and Social Research last week estimated Britain’s economy contracted 0.3 percent in the fourth quarter. The Bank of England policy makers held their target for bond purchases at 375 billion pounds last week.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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

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