U.K. Bonds World’s Worst in Biggest Monthly Decline Since 2009

U.K. government bonds are the worst performers in the developed world over the past month as a sustained economic recovery bolstered speculation about higher interest rates.

Benchmark 10-year gilts declined in February by the most since December 2009 as Bank of England officials said that, despite a slowdown in consumer-price growth, the next move in borrowing costs is more likely to be up than down. That outlook has been supported by data this month showing wage growth outstripping inflation, unemployment dropping to a six-year low and the economy expanding for an eighth consecutive quarter.

“Domestically the data seems to have held up really well,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “The only thing that needs to fall into place is wage inflation. It needs to really start coming through a little more strongly. The market is going to start bracing itself for higher rates in the next 12 months.”

U.K. 10-year yields rose six basis points, or 0.06 percentage point, to 1.79 percent at 4:35 p.m. London time. The rate has climbed 46 basis points since Jan. 30, the first monthly increase since September. The 2.75 percent gilt due in September 2024 fell 0.555, or 5.55 pounds per 1,000-pound ($1,545) face amount, to 108.345.

Gilt Losses

Gilts lost 2.7 percent in the past month through Thursday, according to Bloomberg World Bond Indexes. Treasuries shed 1.1 percent, compared with an average 0.9 percent return by euro-area government securities.

“We shouldn’t let the headline inflation figure detract from the underlying strong fundamentals in the economy,” BOE Monetary Policy Committee member Kristin Forbes said in a Yorkshire Post interview published on Friday. “That means we will need to start to think about normalizing interest rates. We don’t know when yet, and when will depend on the data, it will depend on what happens with wages.”

Pay grew an annual 2.1 percent in the fourth quarter, data showed last week. It exceeded analyst estimates for a 1.7 percent increase. The jobless rate dropped to 5.7 percent.

The central bank’s key interest rate has been at a record-low 0.5 percent since March 2009.

Investors are currently fully pricing a 25 basis-point increase in borrowing costs by April 2016, according to MPC-dated forward Sonia fixings. That assumes the current five basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises rates.

BOE Rates

The pound has appreciated as gilts tumbled. Sterling was the second-biggest gainer in the past month among 10 developed-market currencies tracked by Bloomberg Correlation Weighted Indexes amid speculation the BOE will be the second major central bank to raise interest rates after the Federal Reserve.

While the U.K. currency has strengthened for the first time in eight months against the dollar, its rally may be limited as the U.K. election on May 7 approaches.

Three-month implied volatility of the pound versus the dollar has increased this year by almost 25 percent, more than any of its 15 other peers.

Sterling climbed 0.2 percent at $1.5443, extending this month’s gain to 2.6 percent. It appreciated 0.2 percent to 72.58 pence per euro, after touching 72.52 earlier on Friday, the strongest level since December 2007.

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