U.K. Bonds Decline as Oil Gains Diminish Prospects of Deflation

U.K. government bonds fell, pushing 10-year yields to the highest level in almost a month, as investors’ outlook for inflation increased before a report that economists said will show consumer prices stagnated in March.

The U.K. 10-year break-even rate, a measure of the outlook for inflation derived from a difference in yield between gilts and index-linked bonds, climbed to the most in two weeks. Oil prices have jumped almost 30 percent since touching a six-year low in January, reducing the risk of consumer prices falling. Yield increases have so far been limited by prospects of the Bank of England keeping interest rates at a record low for the rest of the year.

“Though the consensus is for a flat reading, there could be a sense that there might potentially be an upward surprise because of higher” fuel prices during March, said Vatsala Datta, a U.K. rates strategist at Royal Bank of Canada in London. “On a relative basis, the U.K. economy is in a better shape,” said Datta, who expects 10-year yields to rise to 2.2 percent by the end of the year.

Benchmark 10-year yields climbed two basis points, or 0.02 percentage point, to 1.6 percent at 4:20 p.m. London time, and touched 1.64 percent, the highest since March 18. The 5 percent gilt due in March 2025 fell 0.2, or 2 pounds per 1,000-pound ($1,465) face amount, to 131.030.

The 10-year break-even rate increased two basis points to 2.62 percentage points, and reached 2.63, the highest since March 27.

Inflation Data

The U.K. inflation rate stayed at zero last month, the Office for National Statistics will say on Tuesday, according to the median prediction of economists in a Bloomberg survey. BOE Governor Mark Carney has said that the inflation rate will drop below zero in the coming months. That’s looking less likely with oil prices rallying. Even then, policy makers have said they’ll look through the slump in consumer prices as it’s driven by temporary factors.

Gilts have underperformed euro-area government bonds this year as investors debated the timing of the first increase in the benchmark interest rate since July 2007, while the European Central Bank is embarking on an expanded stimulus program that includes purchases of sovereign securities.

U.K. gilts returned 2.2 percent this year through Friday, compared with a 4.3 percent average for the single currency bloc, according to Bloomberg World Bond Indexes.

The pound rose 0.2 percent to $1.4658 and strengthened 0.3 percent to 72.21 pence per euro.

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