BlackRock Says Gilts Are Most Vulnerable as Jobless Rate Falls

U.K. government bonds are the “most vulnerable” among developed-nation debt as an improving economy pressures the Bank of England to start raising interest rates, according to BlackRock Inc.

Five- and 10-year gilts are especially susceptible as the market debates whether the central bank will revise its guidance on the timing for increasing borrowing costs, said Stephen Cohen, head of investment strategy for international fixed income. Britain’s jobless rate dropped to 7.1 percent in the three months through November, the lowest in almost five years, a report showed today.

“We’ve already seen in the U.K. the Bank of England tested by unemployment,” Cohen said at a media briefing in London. “It has come down much faster than they expected and they have already been forced to move their forecasts. There will be pressure on them to adjust the threshold. In our view that makes the U.K. gilt market the most vulnerable.”

The U.K. 10-year yield climbed seven basis points, or 0.07 percentage point, to 2.90 percent at 1:55 p.m. London time, the biggest increase among developed-nation benchmark securities today after Australia. The five-year rate rose nine basis points to 1.81 percent after reaching 1.92 percent on Jan. 2, the highest since July 2011.

The Bank of England Governor Mark Carney said in August policy makers wouldn’t consider increasing interest rates from the current record-low 0.5 percent until unemployment falls to at least 7 percent. When it introduced the policy, the central bank predicted the threshold would only be met in late 2016.

Unemployment Falls

Unemployment measured by International Labour Organization methods dropped from 7.4 percent in the three months through October, the Office for National Statistics said in London. The median forecast of economists was for a decline to 7.3 percent.

The extra yield investors demand to hold 10-year bonds instead of two-year gilts was 232 basis points today after expanding to 252 basis points on Sept. 19, the widest since July 2011. The spread was as narrow as 139 basis points on May 2.

The steepening yield curve is an indication investors are expecting interest rates to rise, Cohen said.

The central bank is unlikely to change its unemployment threshold and may instead shift its focus toward inflation as a gauge of when it will raise interest rates, he said.

“At this stage it’s very difficult to do away with a policy you put in place just six months ago,” he said. “The challenge they have is how do they evolve that policy of forward guidance to meet the realities of what is happening.”

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