U.K. Bond Rally Pushes Yields to Five-Month Low; Pound Weakens

U.K. government bonds advanced, pushing 10-year yields to the lowest level in five months, as Federal Reserve minutes damped speculation U.S. policy makers are moving toward raising interest rates.

Benchmark gilts gained for a second day as the Bank of England left its key interest rate at a record low after its monthly meeting. Bonds were also supported as China reported an unexpected drop in exports, boosting demand for safer assets. Minutes of the Federal Open Market Committee’s March meeting released yesterday showed concern recent interest-rate forecasts may be mistaken as indicating a move toward higher borrowing costs. The pound fell from a seven-week high versus the dollar.

“What is leading the market without a shadow of a doubt is the FOMC minutes,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “We’re also being led higher by the very distorted Chinese data, which was nonetheless very weak. It’s all quite bond positive. I can’t see the BOE doing anything in the near term.”

The 10-year gilt yield fell seven basis points, or 0.07 percentage point, to 2.62 percent at 4:19 p.m. London time after dropping to 2.61 percent, the lowest since Nov. 1. The 2.25 percent bond due September 2023 rose 0.57, or 5.70 pounds per 1,000-pound ($1,678) face amount, to 96.935.

Benchmark yields are unlikely to fall much further with any decline limited to 2.50 percent, Monument’s Ostwald said. The yield will increase to 3.06 percent by the end of June, according to a Bloomberg News survey of financial companies with the most recent forecasts given the heaviest weighting.

BOE Announcement

The Bank of England left its official bank rate at 0.5 percent and maintained its asset-purchase program at 375 billion pounds, it said in announcing the decision made at yesterday’s meeting. The Monetary Policy Committee has said it won’t consider raising borrowing costs at least until unemployment, currently at 7.2 percent, falls to 7 percent.

The central bank will raise its key rate by a quarter of a percentage point by April 2015, according to one-month forward contracts for the sterling overnight interbank average.

Fed officials, in forecasts released last month, upgraded projections for gains in the labor market and predicted the main interest rate will rise to 1 percent by the end of 2015, higher than previously forecast. The minutes of the March 18-19 meeting showed that several policy makers “noted that the increase in the median projection overstated the shift in the projections.”

Chinese exports declined 6.6 percent from a year earlier customs administration said in Beijing. Shipments were forecast to increase 4.8 percent, according to a Bloomberg News survey.

Gilts returned 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds gained 2.4 percent and Treasuries rose 2 percent.

The pound dropped 0.1 percent to $1.6773 after rising to $1.6820, the strongest level since Feb. 17. The U.K. currency weakened 0.3 percent to 82.77 pence per euro.

Sterling has risen 10 percent in the past 12 months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 6.7 percent, while the dollar weakened 0.2 percent.

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