Traders Push Back U.K. Interest-Rate Wagers as Fed Boosts Bonds

  • Ten-year gilts outperform shorter-dated counterparts
  • Pound posts weekly advances against the dollar and euro

In the end, the Federal Reserve’s assessment trumped U.K. domestic data and a Bank of England that had suggested it was willing to look beyond the market turmoil arising from a slowdown in China’s economy.

U.K. government bonds rose for the first time in five days, with two-year yields falling by the most in 11 months. Gilts extended their gains as BOE Chief Economist Andy Haldane said the case for raising U.K. interest rates is still some way from being made. Money-market traders responded to the Fed’s decision on Thursday to keep U.S interest rates at a record low by pushing back wagers on an increase by the BOE to the fourth quarter of 2016.

Longer-dated gilts outperformed those maturing in two years, reflecting a more sanguine outlook for U.K. inflation after the Fed maintained its key rate between zero and 0.25 percent, where it’s been since December 2008, and cited “recent global economic and financial developments” that “may restrain economic activity somewhat.” The pound was set for its first weekly gain versus the euro since July, and reached a three-week high versus the dollar.

“It wouldn’t be unprecedented for the BOE to raise rates before the Fed but it’s unlikely,” said Nick Stamenkovic, a fixed income-strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Clearly the dovish Fed message supported bonds and gilts have followed.”

Benchmark 10-year gilt yields dropped 12 basis points, or 0.12 percentage point, to 1.84 percent as of 4:31 p.m. London time. The 2 percent bond due in September 2025 climbed 1.07, or 10.70 pounds per 1,000-pound ($1,558) face amount, to 101.48. The yield on two-year gilts fell nine basis points to 0.61 percent, the steepest decline since Oct. 15.

Mixed Data

U.K. government bonds had declined this week through Thursday as reports showed retail sales expanded in August, after stagnating the month before, while wage-growth accelerated more than economists predicted in the three months to July. That was even as official data earlier this week showed the consumer-price index returned to zero in August.

Downside risks to inflation include the slowdown in emerging markets and the rise in the pound’s exchange rate, BOE Monetary Policy Committee member Haldane said in a speech at the Portadown Chambers of Commerce in Northern Ireland.

“With subdued world growth and prices, and a sharp appreciation of sterling whose effects in lowering imported prices have yet to fully pass through, I am not as confident as I would like that one percentage point of additional pickup will be forthcoming over the next two years,” Haldane said. “Against that backdrop, the case for raising U.K. interest rates in the current environment is, for me, some way from being made.”

Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s 0.5 percent official bank rate won’t come until November 2016. Going into the Fed’s decision Thursday, pricing suggested a BOE rate increase would come in August.

The pound strengthened 0.5 percent to 73.02 pence per euro, extending this week’s gain to 0.7 percent. Sterling fell 0.1 percent to $1.5575, paring its gain since Sept. 11 to 0.9 percent. The U.K. currency touched $1.5659 earlier Friday, the highest since Aug. 26.

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