U.K. Bonds Fall as BlackRock Says Rate Timing Bets Too Far Out

  • Forward contracts imply no BOE rate increase in next year
  • Current level of key rate inconsistent with data: BlackRock

U.K. government bonds fell for the first time in three days as BlackRock Inc., the world’s biggest money manager, said markets have pushed the timing of an interest-rate increase too far back.

Data on Tuesday showed U.K. economic growth cooled to 0.5 percent in the third quarter, less than analysts forecast and damping expectations of liftoff by the Bank of England, prompting benchmark 10-year gilt yields to drop the most in two weeks. Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016.

“A base rate of 0.5 percent looks inconsistently low given the U.K.’s pace of growth and strong labor market,” Scott Thiel, deputy chief investment officer of BlackRock, wrote in an e-mailed note. “While the BOE is expected to move sometime after the U.S. Federal Reserve, the Fed is looking to start raising rates this year, or early in 2016, and we believe that this means U.K. rates could start rising long before the market expects.”

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 1.80 percent at 4:13 p.m. London time. The 2 percent bond due in September 2025 fell 0.31, or 3.10 pounds per 1,000-pound ($1,532) face amount, to 101.825. The yield dropped 10 basis points over the previous two days.

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