Gilts Fall as Housing-Market Rally Stokes Interest-Rate Concern

U.K. government bonds fell, pushing 10-year yields toward a three-month high, on concern policy makers may need to take action to curb a rally in house prices.

Short-sterling futures contracts declined for a fourth day after Business Secretary Vince Cable said policy makers should review the Help to Buy program that aids home buyers with smaller deposits. The pound snapped a two-day drop versus the dollar as Bank of England Deputy Governor Andrew Bailey said the central bank may take steps to prevent house prices from rising too quickly. The cost of homes may rise 8 percent next year, Halifax, the mortgage unit of Lloyds Banking Group Plc, said.

“The Bank of England are a little concerned about the housing market and they talk about other prudential measures they can use to control housing but ultimately it’s going to be quite hard without rates rising too,” said Jason Simpson, a rates strategist at Banco Santander SA in London.

The benchmark 10-year gilt yield increased two basis points, or 0.02 percentage point, to 2.97 percent at 4:26 p.m. London time after climbing to 2.995 percent on Dec. 20, the highest since Sept. 18. The 2.25 percent bond due in September 2023 fell 0.17, or 1.70 pounds per 1,000-pound ($1,636) face amount, to 94.01.

Short-sterling futures contracts fell as traders added to bets that interbank borrowing costs would rise. The implied yield on the contract expiring in December 2014 rose five basis points to 0.89 percent.

‘Gather Steam’

“We think the recovery is going to gather steam next year and that will bring forward the market pricing of when rates will have to rise,” Santander’s Simpson said. “We’re looking at end of 2014 for first rate hike. The strength of housing market is a factor there.”

Business Secretary Cable told BBC Television’s “Andrew Marr Show” yesterday that the government should review the Help to Buy plan in light of surging house prices in London and the surrounding area.

Rating company Standard & Poor’s said on Dec. 20 Help to Buy “could increase macroprudential risks in the economy by lowering households’ buffers against any future house price volatility.”

The Bank of England is “watching the housing market very carefully,” Bailey said, according to the Telegraph newspaper. The central bank may strengthen tests potential buyers must go through before getting home loans, the Telegraph reported Bailey as saying, citing an interview published on Dec. 21.

Best Performer

The pound rose 0.1 percent to $1.6355 after climbing to $1.6484 on Dec. 18, the highest since August 2011. The U.K. currency slipped 0.2 percent to 83.81 pence per euro.

The pound has gained 5 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as the stronger recovery fueled speculation the central bank may raise rates sooner than it forecasts. The euro appreciated 3.2 percent, while the dollar fell 1.7 percent.

“As long as that data remains relatively good, there will be support for sterling at least in the next few months, at least until perhaps we get a change in forward guidance,” Jane Foley, a senior currency strategist at Rabobank International in London, said in an interview Bloomberg Television’s “On the Move” with Francine Lacqua. Policy makers “are going to have to keep on working to push against those expectations that the hike could come sooner,” Foley said.

Gilts lost 4 percent this year through Dec. 20, according to Bloomberg World Bond Indexes. German securities fell 1.9 percent and U.S. Treasuries declined 2.9 percent.

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