U.K. Bonds Rally as Traders See No Rate Increase Before May 2016

U.K. government bonds climbed for a second week as policy makers from the Bank of England and the Federal Reserve boosted speculation that interest rates around the world will remain lower for longer than economists forecast.

Investors pushed back bets on higher U.K. interest rates until after May 2016, helping support 10-year gilts, whose yields fell to a six-week low.

“The chances of a rate rise or cut are broadly evenly balanced,” BOE Monetary Policy Committee member Andy Haldane said Thursday. His comments followed wage data published a day earlier, which showed U.K. pay growth unexpectedly slowed in the three months through January, dimming the outlook for inflation. In the U.S., Fed Chair Janet Yellen suggested the central bank is in no hurry to raise rates.

“We’re heading back towards the lows we saw at the end of January,” said Daniela Russell, a U.K. rates strategist at Credit Suisse Group AG in London, referring to gilt yields. “From the disappointing labor market release to the more dovish than expected MPC minutes, the relatively dovish Fed, the continued grab for yield and Haldane’s comments, all added fuel to this fiery rally we’re seeing once again.”

The 10-year yield fell 19 basis points, or 0.19 percentage point, this week to 1.52 percent at 5 p.m. London time Friday. It touched 1.51 percent, the lowest since Feb. 5. The 5 percent bond due in March 2025 rose 2.015, or 20.15 pounds per 1,000-pound ($1,498) face amount, to 132.08.

Lift-Off

Gilts have outperformed Treasuries and euro-area bonds over the past month as weaker data than economists forecast helped damp speculation on a rate increase this year. They returned 2.7 percent in the month through Thursday, according to Bloomberg World Bond Indexes.

Investors aren’t fully pricing a 25 basis-point increase in the BOE’s base rate 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 BOE raises borrowing costs.

Data next week will show annual inflation slowed to 0.1 percent in February, from 0.3 percent in January, according to the median forecast of economists in a Bloomberg survey.

BOE Governor Mark Carney has said the rate of consumer-price growth could drop below zero this year. Minutes of the central bank’s March policy meeting published on Wednesday showed officials discussed the risk that a stronger pound would damp inflation, another barrier to raising rates.

The pound strengthened 1.6 percent in the week to $1.4980, even after touching $1.4635 on March 18, the lowest since June 2010. Sterling plunged 1.8 percent to 72.50 pence per euro, halting a six-week advance. It reached a seven-year high against the common currency the previous week.

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