U.K. Bond Swings Show Greek Stalemate Distracts From Rate View

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For U.K. government bonds, another inconclusive day of Greece’s debt talks robbed attention from domestic developments that may portend higher interest rates.

Benchmark 10-year gilts erased gains after a meeting of euro-area finance ministers in Brussels failed to produce a compromise and ended without agreement on a deal that would avert a Greek default.

The headlines that brought gyrations to debt and currency markets overshadowed suggestions this week by a Bank of England policy maker that U.K. borrowing costs may need to climb as soon as the summer, which normally should push yields up. Forward rates don’t signal a full 0.25 percentage-point boost in the benchmark until at least May. The BOE’s official bank rate has been at a record-low 0.5 percent since March 2009.

“If you were looking at this purely from a U.K. perspective, we would be preparing ourselves for rate hikes,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “All assets are going to be impacted on by what’s going on with Greece.”

Benchmark 10-year gilt yields increased one basis point, or 0.01 percentage point, to 2.15 percent as of 4:32 p.m. London time after falling as much as four basis points earlier on Thursday. The price of the 5 percent bond due in March 2025 was 124.865 percent of face value. The yield increased 13 basis points over the previous three days.

Haven Demand

Greece’s failure so far to secure an accord with creditors has boosted demand for havens including gilts, U.S. Treasuries and German bonds. That race is reaching its final stages with the June 30 expiry of the existing euro-area bailout nearing, and a payment of 1.5 billion euros ($1.7 billion) to the International Monetary Fund due that day.

The pound appreciated 0.2 percent to 71.18 pence per euro, after weakening 0.5 percent Wednesday. Sterling rose 0.2 percent to $1.5733, having dropped 1.1 percent in the previous three days.

Sterling strengthened 5.9 percent in the past three months in a basket of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes, the biggest advance in the group.

Comments by BOE Monetary Policy Committee member Martin Weale published June 23 came a week after his colleague Kristin Forbes said U.K. inflation will probably rebound sharply toward the BOE’s 2 percent target. Also on June 17, data showed wages grew at the fastest pace in almost four years.