U.K. inflation expectations tumbled to the lowest in almost four months this week as energy prices fell and government reports signaled growth is slowing, gilt yields show.
The so-called 10-year break-even rate, which predicts consumer-price increases over the next decade, slid to as low as 3.10 percent from this year’s high of 3.39 percent last month. Brent crude prices dropped to the least since July. Gilts gained as data showing a drop in retail sales, rising unemployment and slowing wage growth, adding weight to calls for further stimulus by the Bank of England. The pound slid for a third week against the euro after Fitch Ratings cut the U.K.’s credit ranking.
“There’s definitely been a substantial selloff,” said Marc Ostwald, a London-based rates strategist at Monument Securities Ltd. “If you’re not confident in growth, if you’re sensing in the development in raw-material prices a scenario where the structural problems of the U.K. are not going to play a role immediately and won’t be quite as bad as people assume, then the selloff in index-linked gilts is quite natural.”
The yield on the 10-year index-linked gilt rose 10 basis points this week to minus 1.45 percent after climbing to minus 1.41 percent yesterday, the highest since March 22. The 1.875 percent bond due November 2022 fell 1.32, or 13.20 pounds per 1,000-pound ($1,523) face amount, to 134.295.
The 10-year break-even rate, an index of inflation expectations that measures the yield difference between gilts and index-linked securities, fell 17 basis points, or 0.17 percentage point, to 3.12 percent after touching 3.10 percent yesterday, the least since Jan. 25.
The benchmark 10-year gilt yield dropped to within four basis points of a seven-month low in the week as Bank of England Governor-designate Mark Carney called Britain one of the world’s crisis economies. His comments followed calls by International Monetary Fund Managing Director Christine Lagarde’s call for the U.K. government to relax its fiscal policy.
“There’s three classes of economies in the global economy,” Carney said in Washington yesterday. “The crisis economies, they are well known including the U.S., and I think the insights from Christine Lagarde at the IMF is that the U.S. is breaking out of that pack,” he said. The economies still in crisis “include obviously the euro zone at the center, the U.K. and Japan,” he said.
U.K. March retail sales including fuel fell 0.7 percent from a month earlier, according to an April 18 report. Data a day earlier showed unemployment rose at the fastest pace in more than a year and wage increases slowed, providing further evidence the labor market is succumbing to the weak economy.
The rate on 10-year gilts fell seven basis points this week to 1.66 percent. The pound tumbled 0.4 percent to 85.78 pence per euro and weakened 0.7 percent to $1.5233.
Fitch cut the U.K.’s credit grade one step to AA+ from AAA.
The pound has weakened 4.2 percent this year, the second-worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as signs the economy is struggling to recover fueled speculation the central bank will boost stimulus. The dollar climbed 1.9 percent and the euro gained 1.9 percent.
U.K. government debt has returned 1.9 percent this year through April 18, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming the 0.8 percent gains in U.S. Treasuries and German bonds.