U.K. Bond Gains Push Yields to Record as BOE Rates Seen on Hold

U.K. government bonds rose, pushing 10- and 30-year rates down to records this week, as investors sought higher-yielding alternatives to euro-area debt and on speculation Bank of England borrowing costs will stay subdued.

Ten-year gilts rose for a fifth week, the longest streak since August as data showed Britain’s economy grew at the slowest pace in a year at the end of 2014. BOE Chief Economist Andrew Haldane said on Wednesday that policy makers were in no hurry to raise interest rates and a gauge of the outlook for inflation dropped to five-year low. Sterling weakened versus the euro for the first time in four weeks.

“The grab for yield phenomenon is well and truly in full steam,” said Daniela Russell, U.K. rates strategist at Credit Suisse Group AG in London. It will “keep gilts very well bid. The dovish comments from Haldane make it difficult for rates to sell off at this point.”

Benchmark 10-year yields dropped 15 basis points, or 0.15 percentage point, to 1.33 percent at 5 p.m. London time on Friday, when they reached 1.325 percent, the least on record. The 2.75 percent gilt due in September 2024 rose 1.385, or 13.85 pounds per 1,000-pound ($1,503) face amount, to 112.745.

Thirty-year yields touched 2.036 percent on Friday, the least since Bloomberg began compiling the data in 1996.

Euro-area yields have also slumped to historic lows after the European Central Bank last week pledged to begin buying government securities to boost the region’s economy and stave off the threat of deflation. The rate on 10-year German bunds fell six basis points to 0.30 percent and touched a record-low 0.298 percent on Friday.

Slowing Growth

Britain’s economy grew 0.5 percent in the fourth quarter after expanding 0.7 percent in the three months through September the Office for National Statistics said on Jan. 27.

“We are in no rush to raise rates, the recovery is taking hold nicely, the last thing we want to do is knock the stuffing out of that,” Haldane was reported as saying in an interview with the Daily Post on Jan. 28.

In a speech in Dublin late Wednesday BOE Governor Carney said that U.K. inflation, currently at 0.5 percent, would slow further over the coming months and probably turn “slightly negative” for a period, led by falls in oil prices.

The 10-year break-even rate, a measure of the outlook for retail-price inflation derived from the difference in yield between gilts and index-linked securities, fell 14 basis points to 2.27 percentage points, the lowest since September 2009 on a closing-price basis.

The pound depreciated 0.5 percent to 75.13 pence per euro, the biggest weekly decline since the five-day period ending Dec. 12. Sterling strengthened 0.3 percent to $1.5030, snapping a six-week run of declines.

Next week the Bank of England’s Monetary Policy Committee will keep interest rates at a record-low 0.5 percent, where it has been since March 2009, according to all 47 economists in a Bloomberg News survey.

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