U.K. government bonds ended a three-day gain amid conflicting signals on the outlook for inflation that may muddy the water for Bank of England policy makers as they move closer to raising interest rates.
Thirty-year gilts erased an advance after a survey conducted by Citigroup Inc. and YouGov Plc showed inflation expectations among the public climbed last month to the highest since November. A gauge of the outlook for U.K. inflation had touched a nine-week low after the Bloomberg Commodity Index slumped to the lowest level since 2002 on Monday.
“On one level, everything you look at seems to suggest a rate hike is inching ever closer, but when you look at the price action it suggests all is not as it seems,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “We’re still forecasting that the bank might move in November, but for that to happen the recent falls in oil and commodity prices will have to stabilize.”
The 30-year gilt yield climbed one basis point, or 0.01 percentage point, to 2.53 percent at the 5 p.m. London close, up from 2.49 percent, the lowest level since May 8. The yield dropped 13 basis points over the previous three days. The 3.5 percent bond due January 2045 fell 0.315, or 3.15 pounds per 1,000-pound ($1,563) face value, to 119.995. The yield on benchmark 10-year gilts was little changed at 1.87 percent.
The 10-year break-even rate, which provides a gauge of the outlook for inflation by measuring the yield difference between gilts and index-linked securities, dropped to 2.62 percentage points, the least since May 29.
Borrowing costs fell and demand rose as the Debt Management Office sold 3 billion pounds ($4.7 billion) of 10-year bonds. The DMO allotted securities due in September 2025 at an average yield of 1.979 percent, down from 2.024 percent at an auction in June. Investors bid for 1.37 times the gilts on offer, compared with 1.19 times at the prior sale.
Speculation last month that the BOE will be among the first developed-market central banks to raise interest rates has helped sterling outperform a basket of its developed-market peers. The British currency has climbed 2.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes.
The pound was little changed at 70.15 pence per euro on Tuesday. It rose 0.2 percent to $1.5624.