What happened 5,000 miles away in Beijing is hitting Britain’s shores.
Money-market derivatives show traders pushed back bets for the Bank of England’s first post-crisis interest-rate increase to August 2016 from next May. That’s after China unexpectedly devalued its currency, which economists say will spark a new round of competitive monetary easing and may prove to be deflationary for many economies.
More investors are speculating that China’s moves will prompt the Federal Reserve to delay tightening policy to beyond next month. All that helps debt securities. U.K. government bonds surged for a second day, pushing 10-year yields to the lowest since April, while a benchmark for inflation expectations dropped to the least in almost five months.
“It makes it much more difficult for either the Bank of England or the Fed to think about raising rates,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management LLP in London. “The 10-year, and particularly the 30-year, gilts have been rallying quite strongly since late-June. I think we’ll get more of that.”
The benchmark 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.79 percent as of 4:40 p.m. London time. It fell to 1.74 percent earlier, the lowest since April 29. The 5 percent bond due in March 2025 rose 0.28, or 2.80 pounds per 1,000-pound ($1,564) face amount, to 128.115.
The sterling overnight index average, or Sonia, which reflects speculation on interest rates, now prices in a 25-basis point increase next August. On Tuesday, it implied a move in May. The BOE hasn’t raised its key rate since 2007 and the benchmark has been at a record-low 0.5 percent since 2009.
Britain’s five-year break-even rate, a gauge of inflation expectations, dropped to as low as 2.32 percentage points, the lowest since March, and ended little changed at 2.36 percentage points. Oil prices, which are closely linked to market perception of future consumer-price growth, held near their lowest close in about six years.
Gilts stayed higher after a report showed unemployment rose and wage growth slowed in the second quarter. That implies a slowdown in the recovery of the labor market, which policy makers watch when assessing interest rates.
The pound weakened 1 percent to 71.62 pence per euro, the biggest decline in about three weeks. It rose 0.4 percent to $1.5640.
“I see this as a short-term correction for the pound as the market is spooked by China devaluation fears,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “That and lower oil prices are prompting the market to pare back expectations for BOE’s rates outlook.”
Sterling is still 5.6 percent higher over the past six months, the best performer among 10 developed-market currencies, according to Bloomberg Correlation-Weighted Indexes.