U.K. government bonds fell, halting a two-day advance, before a report this week that economists forecast will show wage growth held at a six-year high in June.
Gilts dropped alongside U.S. Treasuries and German bonds as a rally in stocks amid speculation China’s government will boost stimulus damped demand for the safest fixed-income assets. The pound rose against the dollar and euro, having declined last week after fewer policy makers than analysts predicted voted to raise interest rates this month. Bank of England Governor Mark Carney said the timing of such a move will be data-dependent, and the market judged wage data as one of the key indicators.
“Wage data will be very important for the market,” said Jason Simpson, a London-based rates strategist at Societe Generale SA, one of 21 gilt primary dealers. “Anything that suggests an upside risk will be negative for gilts, especially at the front end of the curve.”
The benchmark 10-year gilt yield climbed seven basis points, or 0.07 percentage point, to 1.92 percent as of 4:23 p.m. London time. That left the yield spread versus two-year securities four basis points wider at 130 basis points, having narrowed earlier to 125 basis points, the tightest since April 29. The price of the 5 percent bond due in March 2025 fell 0.755, or 7.55 pounds per 1,000-pound ($1,555) face amount, to 126.79.
A so-called flattening yield curve, where the yields on shorter-maturity bonds rise faster than those on long-dated securities, may suggest investors are betting policy makers will raise borrowing costs.
The BOE hasn’t raised its key rate since July 2007 and the benchmark has been at a record-low 0.5 percent since March 2009.
Regular weekly earnings rose an annualized 2.8 percent in the three months through June, unchanged from the previous period, the Office for National Statistics will say Aug. 12, according to the median forecast of analysts in a Bloomberg survey. The 2.8 percent pace was the strongest since February 2009. A separate report, also due on Aug. 12, is forecast in a Bloomberg survey of economists to show the U.K. unemployment rate held at 5.6 percent.
Wage growth has accelerated for four consecutive months, rising to 2.8 percent in May from 1.6 percent in January. The aggregate gilt yield increased by about 40 basis points in the corresponding period.
The pound rose 0.4 percent to $1.5545, having fallen 0.8 percent last week. It appreciated 0.2 percent to 70.65 pence per euro.
Sterling gained 11 percent in the past year, making it the best performer among developed-nation currencies after the U.S. dollar, which returned 20 percent, according to Bloomberg Correlation-Weighted Indexes.
“If we see a sharp rise in wages this week, that could lead to an unwinding of recent short-term weakness for the pound,” said Nick Stamenkovic, a strategist at broker RIA Capital Markets Ltd. in Edinburgh. “If the data remains subdued, clearly the market will suggest that the Bank of England will hold off till next year and the pound will struggle to make much headway, particularly against the dollar.”