U.K. Bonds Advance for a Fourth Week on Interest-Rate Prospects

U.K. 10-year government bonds rose for a fourth week, pushing yields to an 18-month low, as data showing house-price growth slowed and consumer confidence stalled buoyed the case to maintain record-low borrowing costs.

Two-year yields slipped to the lowest in nine months, reflecting demand for shorter-dated gilts which are more sensitive to the outlook for Bank of England interest rates. Citigroup Inc. said the central bank won’t raise rates until the fourth quarter of 2015. Britain’s bonds gained in the week with their euro-area peers as a report showed inflation in the currency bloc slowed in November and crude oil prices touched the least since July 2010. The pound fell for a second day.

“The U.K. is not immune to disinflationary pressure from abroad and the decline in world economic growth,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “The BOE has taken a very dovish tone” and with “the way the world economic growth is being revised down, and disinflationary pressure from oil, that seems to be the path of least resistance,” he said, referring to falling yields.

Benchmark 10-year gilt yields were little changed at 1.93 percent as of 4:57 p.m. London time and touched 1.90 percent, the lowest level since May 28, 2013. The price of the 2.75 percent bond due in September 2024 was 107.295 percent of face value. The rate has dropped 12 basis points this week, the steepest decline since the five-day period ended Oct. 10.

Losing Momentum

Two-year yields rose two basis points, or 0.02 percentage point, to 0.51 percent after falling to 0.485 percent, the least since Feb. 28.

Adding to signs the Group of Seven’s fastest-growing economy is losing momentum, Nationwide Building Society said today that house prices posted the smallest increase in 11 months in November. A gauge of U.K. consumer confidence held at minus 2 this month, research company GfK NOP said. A government report this week showed exports and business investment fell in the third quarter even as the economy expanded.

BOE Governor Mark Carney told lawmakers in London this week interest rate increases would likely be limited and gradual and that the country still “requires monetary stimulus to grow above trend and bring inflation back to target.”

Forecast Revised

Citigroup had previously predicted the first increase in interest rates in the second quarter of next year, chief Western Europe economist Michael Saunders wrote in a note dated today. The November policy meeting is the most likely date for an increase of 25 basis points, he said. Key reasons for the change in the forecast are the plunge in oil prices and general weakness in food and import costs, according to the note.

Forward contracts based on the sterling overnight interbank average, or Sonia, show traders have delayed bets for a 25 basis-point increase in the U.K. benchmark rate to beyond October. Three months ago, the market was priced for an increase in February.

Brent crude oil declined as much as 2 percent to $71.12 per barrel in London today. Falling oil prices drag down prospects for inflation, helping to preserve the value of fixed-income securities.

Gilts earned 13 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities returned 9 percent and U.S. Treasuries 5.6 percent.

The pound dropped 0.6 percent to $1.5637 and weakened 0.4 percent to 79.53 pence per euro.

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