U.K. Bonds Advance as BOE Rate-Rise Bets Pushed Back

U.K. government bonds advanced, with 10-year yields posting their biggest weekly decline since March, as traders pushed back forecasts for when the Bank of England will raise interest rates.

The pound fell to the lowest level in a month against the dollar as central bank Governor Mark Carney said May 14 the institution is prepared to wait until next year to increase borrowing costs as there remains slack in the economy. Sterling weakened from a 16-month high against the euro as a report showed weekly earnings rose at a slower pace than economists estimated in the three months through March.

“Carney changed the whole mood of things,” said Peter Osler, head of rates strategy at Marex Spectron Group Ltd. in London. “The Bank of England is far away from tightening. Sooner or later, you are going to get the mother of all bear markets in bonds but it’s not going to happen until they are very close to moving. It certainly flushed out a lot of shorts,” he said, referring to bets gilts will decline.

The 10-year yield dropped 12 basis points, or 0.12 percentage point, this week to 2.56 percent at 5 p.m. London time, the steepest decline since the period ended March 14. The rate fell to 2.52 percent on May 15, the lowest since Aug. 13. The 2.25 percent gilt due in September 2023 rose 0.98, or 9.80 pounds per 1,000-pound ($1,683) face amount, to 97.415. The two-year yield slid eight basis points to 0.68 percent, the biggest drop since the five-day period through Jan. 3.

BOE Expectations

U.K. policy makers said in their quarterly Inflation Report May 14 that there “remains scope to make greater inroads into slack before raising” interest rates. Derivatives based on the sterling overnight interbank average show investors are betting that the Bank of England will keep borrowing costs at a record-low 0.5 percent through May 2015. Earlier this week they showed expectations for a 25 basis-point increase in February. Minutes of this month’s central-bank meeting are due to be released on May 21.

The pound dropped versus 11 of its 16 major peers this week as the Office for National Statistics said on May 14 wages including bonuses rose 1.3 percent in the first quarter, less than the estimate of 1.5 percent in a Bloomberg survey.

The U.K. currency fell 0.1 percent from May 9 to $1.6828 after falling to $1.6732 on May 15, the lowest since April 16. Sterling gained 0.3 percent to 81.45 pence per euro after appreciating to 81.27 pence on May 14, the strongest level since Jan. 7, 2013.

A report next week will show consumer-price inflation accelerated to 1.7 percent in April, from 1.6 percent the previous month, according to a separate survey.

Gilts returned 4.2 percent this year through May 15, Bloomberg World Bond Indexes show. German bonds gained 4.2 percent and Treasuries earned 3.3 percent. The pound advanced 0.7 percent this year among a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro weakened 1.4 percent and the dollar fell 1.1 percent.

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