U.K. Bonds Rise Third Day Before Fed Policy Meeting, BOE Minutes

U.K. government bonds rose for a third day, pushing the 10-year yield to the lowest level in four weeks, as investors sought the safest assets while awaiting signals from a Federal Reserve policy meeting this week.

Gilts also advanced as traders pushed out forecasts for a Bank of England interest-rate increase beyond May 2016 after Governor Mark Carney last week indicated policy makers were becoming more cautious over the effect of sterling’s advance. The central bank’s key rate has been at a record-low 0.5 percent since March 2009. The BOE is set to publish minutes of this month’s policy meeting on Wednesday, while the Fed’s Open Market Committee starts a two-day meeting in Washington on Tuesday.

“The big thing to watch is the FOMC and the impact that has on risk assets,” said Jason Simpson, a fixed-income strategist at Societe Generale SA in London. “There’s been a lot of short covering in gilts ahead of that,” he said, referring to investors ending bets an asset’s price will decline. “Big global issues rather than domestic ones will be the driver.”

The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 1.68 percent at 4:55 p.m. London time, and earlier touched 1.655 percent, the lowest since Feb. 12. The 5 percent bond due in March 2025 rose 0.305, or 3.05 pounds per 1,000-pound ($1,481) face amount, to 130.37.

Similar-maturity U.S. Treasuries rose, pushing the yield down three basis points to 2.08 percent.

Rate Outlook

Investors are currently not fully pricing a 25 basis-point increase in U.K. interest rates until after May 2016, compared with February as recently as March 6, according to MPC-dated forward Sonia fixings data provided by ICAP Plc. That assumes the current four basis-point spread for Sonia fixings below the Bank Rate would return to zero once the BOE raises borrowing costs.

“If anything, you’d expect the minutes to be a little more dovish,” said Societe Generale’s Simpson. “It’s going to be quite difficult for the market, unless sterling spikes higher, to push that first rate hike further into the future so I’m not overly constructive on gilts.”

The pound halted a four-day drop against the dollar, rising 0.6 percent to $1.4832. The U.K. currency dropped to $1.47 on March 13, the lowest since June 2010. Sterling weakened 0.5 percent to 71.52 pence per euro.

U.K. securities are the worst-performing European sovereign-debt market this year after Greece, according to Bloomberg World Bond Indexes. Gilts returned 0.4 percent through Friday, while U.S. Treasuries earned 0.6 percent and euro-area government bonds returned 4.4 percent, bolstered by European Central Bank purchases under its quantitative-easing program.

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