U.K. Bonds Fall as Yellen Spurs Speculation of BOE Rate Increase

  • Benchmark 10-year securities decline most in one month
  • SocGen forecasts BOE to raise U.K. rates in February

U.K. 10-year government bonds posted their biggest daily decline in a month after Federal Reserve Chair Janet Yellen said the U.S. central bank was on course to raise interest rates this year, boosting speculation that the Bank of England will follow.

Benchmark gilts fell alongside U.S. Treasuries after Yellen placed herself in the camp of those Federal Open Market Committee officials who favor the Fed increases its benchmark interest rates from record lows in 2015. This comes just a week after the Fed refrained from increasing interest rates which prompted investors to delay their calls on when the BOE would move.

“Most of the losses were largely on the back of Janet Yellen suggesting rates will still rise in the U.S. this year,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. “The fact that it has been reiterated and Yellen was much more hawkish than the messages that were sent out after the September FOMC meeting,” pushed U.K. gilts lower, he said.

Ten-year gilt yields rose nine basis points, or 0.09 percentage point, to 1.85 percent as of the 5 p.m. London close. That’s the biggest increase since Aug. 25. The 2 percent bond due in September 2025 fell 0.78, or 7.80 pounds per 1,000-pound ($1,517) face amount to 101.45.

Simpson predicted the BOE will tighten monetary policy in February, earlier than money markets are pricing in.

Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full quarter-point increase to the BOE’s 0.5 percent official rate won’t come until beyond November 2016.

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