U.K. Yields at One-Year Low Signal Scorn for IMF Rates Warning

One day after the International Monetary Fund said the U.K. may need higher central-bank interest rates, bond investors spurned that warning by pushing long-term gilt yields to their lowest in more than a year.

Price gains today drove down yields on most benchmark U.K. government securities. The 30-year rate touched its lowest since August 2012, a sign investors have become less concerned that inflation will accelerate enough to push the Bank of England to expedite rate increases in coming months.

The extra yield, or spread, they get to hold 30-year bonds instead of those due in two years has slipped more than half a percentage point since BOE Governor Mark Carney said in June that officials may raise rates earlier than investors expected. Demand for gilts surged as reports showed Britain’s recovery is losing momentum and as the European Central Bank expanded stimulus. That boosted the allure of the U.K., where 10-year yields already are almost 1.4 percentage points above Germany’s.

“There’s now a realization that this is is going to be a very low and slow cycle and that means the curve still looks pretty steep,” said Robin Marshall, London-based director of fixed income at Smith & Williamson Investment Management, who manages the equivalent of about $24 billion and favors 30-year gilts over those due in five years. “The market has got too much priced in” expecting a rate increase.

The IMF said yesterday that the BOE may have to raise rates to rein in threats to financial stability from the housing market.

Curve Flattening

The 30-year gilt yield declined two basis points, or 0.02 percentage point, to 2.94 percent as of 4:25 p.m. London time, having been as low as 2.90 percent, the least since Aug. 31, 2012. The 3.25 percent bond maturing January 2044 gained 0.415, or 4.15 pounds per 1,000-pound ($1,606) face amount, to 105.99.

That left the yield 220 basis points higher than that of two-year securities, and down from a spread of 315 basis points in January and 274 on June 12, the day of Carney’s debut speech at the Mansion House, where he told his audience that a rate increase “could happen sooner than markets currently expect.”

Ten-year gilt yields fell three basis points to 2.26 percent and had touched 2.23 percent, the least since June 2013.

Yields have dropped in the past six months across the curve, a chart of rates for bonds of different maturities. That came as reports signaled the U.K. economic recovery may be slowing, as the ECB cut interest rates and political turmoil in the Middle East boosted demand for havens.

U.K. house-price growth has peaked and will probably ease this year and next as demand wanes, Halifax, the mortgage unit of Lloyds Banking Group Plc said in a statement today.

While data last week showed the recovery from the recession has been stronger than previously estimated, there also have been signs of a slowdown recently, with a manufacturing index by Markit Economics falling to a 17-month low in September.

Gilts returned 8.8 percent this year through yesterday, compared with a 4.7 percent gain for Treasuries, according to Bloomberg World Bond Indexes. Euro-area government securities made 10 percent.

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