U.K. Bond Yields Drop Most in Five Weeks on Tensions in Ukraine

U.K. government bonds rose, with 10-year yields falling the most in five weeks, as deepening tensions in Ukraine and reports of Russian fighter planes being put on combat alert boosted demand for haven assets.

The 10-year gilt climbed with European securities, pushing the yield to the lowest in three weeks, as Interfax news agency reported Russia had readied jets near its western border as part of military exercises announced yesterday. The pound reached a one-week high versus the euro as Bank of England Chief Economist Spencer Dale said interest-rate increases will be gradual and remain below pre-crisis levels “for some time to come.”

“The situation in Ukraine is causing risk aversion,” said Richard Kelly, senior strategist at Toronto-Dominion Bank in London. “It’s a key factor that’s driving demand for safe-haven assets including gilts.”

The benchmark 10-year gilt yield fell five basis points, or 0.05 percentage point, to 2.67 percent at 4:40 p.m. London time, the biggest drop since Jan. 23. The rate slid to 2.64 percent, the lowest since Feb. 5. The 2.25 percent bond maturing in September 2023 rose 0.445, or 4.45 pounds per 1,000-pound ($1,665) face amount, to 96.485.

German 10-year bund yields fell six basis points to 1.56 percent after touching 1.55 percent, the lowest since July 24.

Ukraine Turmoil

Gunmen occupied parliament and the government building in Ukraine’s Crimea region and raised the Russian flag as lawmakers in the capital approved a new cabinet after last week’s ousting of Viktor Yanukovych as president. Lawmakers in Kiev backed opposition leader Arseniy Yatsenyuk as interim premier so he can begin loan talks to stave off default.

The pound traded at $1.6681, from $1.6671 yesterday. Sterling was at 82.19 pence per euro after appreciating to 81.98 pence, the strongest level since Feb. 18.

The U.K. currency has gained 13 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as a strengthening economy fueled speculation the Bank of England would raise borrowing costs sooner than it forecast. The euro appreciated 6.2 percent and the dollar rose 1.3 percent.

The Bank of England cut its Official Bank Rate to a record-low 0.5 percent in March 2009.

Interest Rates

“Because of the lasting effects of the financial crisis, interest rates will remain below that level for some time,” Dale said in an interview with Belfast Telegraph newspaper. “At some point rates will rise. I don’t know when but the key thing is when they do rise they are likely to rise gradually because we’re very focused on making sure we support the recovery.”

Central bank policy maker David Miles is due to speak to an economics and government forum in London today. When rates do finally begin rising, it’s unlikely they will exceed 5 percent, he was quoted as saying in the Yorkshire Post newspaper today.

“There are some pretty strong reasons why what you call the new normal is likely to be quite significantly lower,” he said in the Post interview. He also said “it’s a ways down the road before we get a position of unwinding” the 375 billion pounds of assets the Bank of England bought under its quantitative easing stimulus program in the wake of the financial crisis.

Britain’s economy grew 0.7 percent in the fourth quarter from the previous three months, the same as previously estimated, the Office for National Statistics said yesterday. From a year earlier, the economy expanded 2.7 percent, the most in almost six years.

“Sterling is already well bid because of the good economic data,” said Stuart Bennett, head of Group-of-10 foreign-exchange strategy at Banco Santander SA in London. “The market has been very upbeat on sterling so it’s pushed it stronger.”

U.K. gilts returned 2.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 2.3 percent and U.S. Treasuries advanced 2 percent.

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