Gilts Fall Fourth Week as Growth Signs Fuel Bets on Higher Rates

U.K. government bonds fell for a fourth week as signs the economy is gathering momentum fueled speculation the Bank of England will raise interest rates sooner than policy makers forecast.

Benchmark 10-year yields climbed to the highest level since August 2011 as investors boosted wagers the central bank will increase its key rate before 2016, when policy makers anticipate unemployment will have fallen enough to justify higher borrowing costs. The pound strengthened for a second week against the dollar and euro. Sterling has been the best-performing major currency during the past six months.

“Until we hear some central-bank comments come out trying to calm the markets, we’ll probably see this selloff continue” on expectation of higher rates, said Owen Callan, an analyst at Danske Bank A/S in Dublin. “We’ve seen the first big move already and it may not be quite as volatile next week.”

The U.K. 10-year yield climbed 24 basis points, or 0.24 percentage points, this week to 2.70 percent, the biggest increase since the period through June 21. The 1.75 percent bond due September 2022 fell 1.875, or 18.75 pounds per 1,000-pound ($1,561) face amount, to 92.385. The yield rose to 2.71 percent on Aug. 15, the highest since Aug. 9, 2011.

Data this week showed retail sales rose more in July than economists forecast, while the rate for jobless claims dropped to the lowest since February 2009. Purchasing managers surveys of services, manufacturing and construction activity all improved in July, according to figures released this month.

Jobless Rate

Bank of England Governor Mark Carney has pledged to refrain from raising borrowing costs until the unemployment rate falls to 7 percent, which policy makers don’t expect until at least the fourth quarter of 2016. Seventeen of 25 forecasters in a Bloomberg survey say unemployment will fall to that level by mid-2016, with 13 saying it will happen in 2015 at the latest.

The implied yield on short-sterling futures contracts expiring in September 2016 increased 38 basis points this week to 2.21 percent, signaling traders added to bets that borrowing costs will increase as the economy improves.

Gilts lost investors 4.6 percent this year through Aug. 15, according to Bloomberg World Bond Indexes show. German bunds dropped 2.4 percent and Treasuries declined 3.4 percent.

The pound climbed 0.8 percent this week to $1.5621 after rising to $1.5657 yesterday, the highest since June 19. The U.K. currency appreciated 0.9 percent to 85.28 pence per euro.

Sterling has appreciated 4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.9 percent and the dollar rose 3.2 percent.

The Debt Management Office is scheduled to auction 1.75 billion pounds of inflation-linked gilts maturing in 2019 on Aug. 20. The U.K. last sold similar securities in June 2010.

Before it's here, it's on the Bloomberg Terminal.