U.K. Bonds Rise as Inflation Data Kills Higher-Rates Bets

U.K. government bonds rose for a third day, pushing 30-year gilt yields to a record low, as the slowest U.K. inflation in almost 15 years caused traders to abandon bets that the Bank of England will raise interest rates.

A gauge of the outlook for U.K. inflation touched the lowest in more than two years as factory-gate prices, a leading indicator, fell the most in five years. The weakening price growth adds to data signaling Britain’s recovery is losing momentum, keeping the pound at about 1 percent from an 18-month low versus the dollar.

“Inflation is slowing very sharply and the market is rightly anticipating, largely as a result of that, that the prospect of monetary tightening has disappeared over the horizon now,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “It keeps yields declining.”

The rate on 30-year gilts dropped two basis points, or 0.02 percentage point, to 2.30 percent at 4:32 p.m. London time and touched 2.248 percent, the least since Bloomberg began collecting the data in 1996. The 3.25 percent bond due in January 2044 rose 0.42, or 4.20 pounds per 1,000-pound ($1,517) face amount, to 120.13. Benchmark 10-year yields fell to 1.51 percent, the lowest level since August 2012.

The 10-year break-even rate, which provides a gauge of inflation expectations by measuring the yield difference between gilts and index-linked securities, dropped to as low as 2.45 percentage points, the least since October 2012.

Lowest Rate

Consumer prices rose an annualized 0.5 percent in December after climbing at a 1 percent pace a month earlier, the Office for National Statistics said today. That’s the lowest rate since May 2000 and below the 0.7 percent median forecast of economists surveyed by Bloomberg News.

Gilts returned 15 percent last year, the most since 2011, according to Bloomberg World Bond Indexes, as stalling global growth and plunging commodity prices convinced investors interest rates are likely to stay lower for longer. Treasuries earned 6.2 percent in 2014 and German securities gained 10 percent, the indexes show.

Brent crude oil for February settlement slid as much as 4.7 percent to $45.19 a barrel on the London-based ICE Futures Europe exchange, a level not seen since March 2009. Copper prices fell for a fifth day, slumping to the lowest since October 2009.

Forward contracts showed investors are betting the sterling overnight interbank average, or Sonia, will be at 0.54 percent at the BOE’s December policy meeting, from 0.43 percent next month. The central bank’s official borrowing rate has been at 0.5 percent since March 2009.

Buying Opportunity

The pound rebounded after dropping against the euro as European Central Bank policy makers fueled speculation that they will begin buying sovereign debt, known as quantitative easing, as early as next week to stave off deflation in the common-currency area.

“The U.K. is not unique in this issue,” Chris Turner, London-based head of currency strategy at ING Groep NV, said in an interview on Bloomberg Television’s “On The Move” with Jonathan Ferro, before the inflation data was released. “If sterling does sell off on this, the market may find better levels to buy sterling particularly against the euro where QE is coming over the next couple of months.”

ING was the world’s most accurate foreign-exchange forecaster in 2014, according to rankings compiled by Bloomberg.

The median of economist estimates compiled by Bloomberg predicts the pound will be at $1.52 by year-end, and strengthen to 76 pence per euro.

Sterling was little changed at $1.5182 after sliding to $1.5035 on Jan. 8, the lowest level since July 2013. The pound advanced 0.4 percent to 77.67 pence per euro after weakening 0.5 percent earlier.

Before it's here, it's on the Bloomberg Terminal.