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U.K. Bonds Rise as Ukraine Tension Boosts Demand for Safety

April 15 (Bloomberg) -- U.K. government bonds rose, with 10-year yields approaching the lowest level since October, as tension in the eastern Donetsk region of Ukraine escalated, boosting demand for the safest fixed-income securities.

Two-year gilts snapped a two-day decline as Ukraine’s government said it has identified Russian military in the towns of Slovyansk and Kramatorsk. Gilts also advanced as U.K. government data today showed annualized inflation fell to the lowest in 4 1/2 years in March. A separate report tomorrow is forecast by economists to show average weekly earnings rose in the three months through February. The pound was little changed.

“The move into the core is Ukraine related, where the situation doesn’t seem to be getting any steadier,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The U.K. inflation data are encouraging for gilts to some extent. The average earnings data tomorrow will be critical.”

The 10-year gilt yield fell three basis points, or 0.03 percentage point, to 2.60 percent at 4:45 p.m. London time after dropping to 2.59 percent on April 11, the lowest since Oct. 31. The 2.25 percent bond due in September 2023 rose 0.27, or 2.70 pounds per 1,000-pound ($1,672) face amount, to 97.07. The two-year rate fell two basis points to 0.63 percent.

Ukrainian units are undertaking an offensive to dislodge militants from towns in its eastern Donetsk region as Russia’s Prime Minister Dmitry Medvedev said the country risks civil war.

Inflation Slows

Overall U.K. consumer-price inflation slowed to 1.6 percent from 1.7 percent in February, the Office for National Statistics said. That’s the lowest rate since October 2009. Slower inflation preserves the value of fixed payments on bonds.

The Bank of England’s Monetary Policy Committee has kept interest rates at a record-low 0.5 percent since March 2009 to spur growth.

“We expect today’s print to be the local trough in inflation, and forecast it to rise modestly towards 2 percent in the next few months before returning below the MPC’s target in the second half of the year,” Goldman Sachs Group Inc. economists, including London-based Kevin Daly, wrote in an e-mailed note.

The statistics office will say tomorrow the unemployment rate fell to 7.1 percent in the three months through February, according to the median estimate of analysts in a Bloomberg News survey, approaching the level of 7 percent that Bank of England policy makers have said would prompt them to consider raising interest rates.

Rate Threshold

Officials said in February there would be scope to maintain record-low borrowing costs even after the threshold was reached.

U.K. gilts earned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds returned 2.8 percent and Treasuries earned 2.3 percent.

The pound was at 82.58 pence per euro after appreciating 0.5 percent yesterday. The U.K. currency traded at $1.6719, from $1.6729 yesterday.

Sterling rose 4.6 percent in the past six months, the best performer of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 1.9 percent, while the dollar weakened 0.4 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net; Nicholas Reynolds at nreynolds2@bloomberg.net Keith Jenkins, Mark McCord

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