Yellen Countdown Eases Carney Burden as Rates Drop: U.K. Credit

Bank of England Governor Mark Carney is experiencing again that when it comes to the gilt market the Federal Reserve is king.

The 10-year U.K. government bond yield fell 12 basis points to 2.72 percent in two days through Oct. 18 amid speculation that the economic disruption resulting from the U.S. fiscal standoff will prompt the Fed to postpone tapering its stimulus program as Janet Yellen prepares to take over from Chairman Ben S. Bernanke in January. The rate on similar-maturity U.S. notes slid eight basis points to 2.58 percent.

“It’s all about the U.S. at the moment,” said Jason Simpson, a U.K. rates strategist at Banco Santander SA in London. “There is the question about how the shutdown has hurt the U.S. economy, and then there’s Yellen taking over in the new year, so people now think it’s more likely that the Fed will taper later.”

The moves underscore the influence of the Fed on U.K. markets at a time when Carney is struggling to persuade investors he can keep the benchmark interest rate at a record-low 0.5 percent until 2016 as the U.K. economy gains traction. Gilts yielded less than Treasuries as recently as Sept. 4.

The implied yield on short-sterling futures contracts expiring at the end of next year, a measure of investor bets on interbank borrowing costs, slid last week to 0.83 percent, the lowest level since Oct. 9. The rate was at 0.84 percent today.

Economic Recovery

The 10-year gilt yield rose two basis points to 2.74 percent at 4:25 p.m. London time, while the U.S. 10-year rate climbed three basis points to 2.61 percent.

For Carney, Washington proved less helpful over the summer as global yields surged after Bernanke said the central bank may taper its $85 billion in monthly bond buying. U.S. policy makers unexpectedly refrained from reducing the purchases last month, saying they wanted more evidence of an economic recovery.

U.S. lawmakers agreed last week on a plan to end the 16-day government shutdown that cost the economy an estimated $24 billion.

BlackRock Inc. and Pacific Investment Management Co. said the Federal Reserve will postpone tapering as a result of the impasse. Chicago Fed President Charles Evans said the central bank should hold back as the data used to gauge the economy’s health stopped during the shutdown.

‘Strongly Dovish’

Yellen, who needs to be confirmed by the Senate, said on Oct. 9 that more needs to be done to strengthen the recovery and that the Fed can promote employment growth while holding down inflation.

As deputy to Bernanke, she supported the Fed’s unprecedented bond-buying programs and was a force behind a new strategy adopted in 2012 to commit the central bank to goals on inflation and unemployment.

“The fact that there’s someone of such strongly dovish views on monetary policy leading the world’s most important central bank will probably enhance discussion as to how other policy makers should communicate with markets,” said Isobel Lee, head of global fixed-income bonds at Insight Investment Management Ltd. in London, which oversees $408 billion in assets. “Europe’s central bankers could study some of the things Yellen’s been saying.”

Gilts Underperform

Gilts are underperforming Treasuries amid signs that Britain’s economy is gathering momentum. Growth accelerated to 0.8 percent in the third quarter from 0.7 percent in the second, according to the median of 40 forecasts in a Bloomberg survey. That would be the strongest pace since 2010. The Office for National Statistics is due to announce the figures on Oct. 25.

U.K. government bonds lost 3 percent this year through Oct. 18, according to Bloomberg World Bond Indexes. Treasuries fell 2.1 percent and German debt slid 1.8 percent.

“As much as you can say the data in the U.K. is very strong, the U.S. is at the center-point of the outlook,” said Simon Peck, rates strategist at Royal Bank of Scotland Group Plc in London. “Expectations of Fed tapering have moved back well into next year. The medium and long-term picture very much depends on what goes on in the U.S.”

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