U.K. Bonds Climb for 2nd Day as Fed Signals Low Rates for Longer

U.K. government bonds climbed for a second day amid speculation global borrowing costs will remain lower for longer after the U.S. Federal Reserve pared its interest-rate forecasts.

The pound dropped versus the dollar after Bank of England Chief Economist Andrew Haldane said there’s a risk weak inflation may persist and policy makers must be ready to cut interest rates further. Minutes of the BOE’s March policy meeting published Wednesday revealed officials were already pondering how the pound’s recent gains versus the euro may damp consumer prices. The 10-year gilt yield reached a six-week low after data this week showed a slowdown in U.K. wage growth.

The Fed comments are “broadly supportive for core fixed income,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “We had a relatively dovish set of data and minutes yesterday morning which provided a bit of a boost to gilts on a cross-market basis and a bit more of a follow through from that this morning.”

The 10-year gilt yield fell six basis points, or 0.06 percentage point, to 1.54 percent at 4:36 p.m. London time and touched 1.51 percent, the lowest since Feb. 5. The rate dropped nine basis points on Wednesday. The 5 percent bond due in March 2025 rose 0.595, or 5.95 pounds per 1,000-pound ($1,474) face amount, to 131.85.

Rate Outlook

Investors have pushed back bets on higher U.K. interest rates and are currently not fully pricing a 25 basis-point increase until after May 2016, compared with February earlier this month, 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 central bank raises borrowing costs.

“The chances of a rate rise or cut are broadly evenly balanced,” the BOE’s Haldane said. “In other words, my view would be that policy may need to move off either foot in the immediate period ahead, depending on which way risks break.”

The yield difference between 10-year gilts and similar-maturity Treasuries dropped to the lowest level since July 2006, based on closing-price data. The benchmark U.S. yield increased six basis points to 1.98 percent, narrowing the spread to 44 basis points below that of the U.K. bond.

The Debt Management Office sold 2.75 billion pounds of 2 percent gilts due in September 2025 at an average yield of 1.683 percent, up from a record-low 1.622 percent at a previous sale of September 2024 bonds on Jan. 6.

The pound dropped 1.6 percent to $1.4733. The U.K. currency rose in the wake of the Fed’s decision on Wednesday, when it climbed 1.6 percent, the biggest gain versus the dollar since July 2010. Sterling halted a three-day decline against the euro, strengthening 0.5 percent to 72.19 pence.

Pound Prediction

UniCredit SpA forecasts the pound will weaken to 75.25 pence against the 19-member currency amid uncertainty the May 7 general elections will result in any party gaining a majority and stronger euro-area economic data.

The Citigroup Economic Surprise Index for the euro region was at 40.30 Thursday and has been above its a one-year average of minus 16.76 since December. A positive number means data releases have been stronger than expected. An equivalent U.K. gauge was minus 3.30, versus a 12-month average of minus 4.29.

“Political uncertainty remains in focus,” UniCredit analysts including Vasileios Gkionakis, the London-based head of global foreign-exchange strategy, wrote in a e-mailed note. “At the same time, data in the euro area are quite likely to continue surprising on the upside.”

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