U.K. Bonds Drop as Rate Speculation Sends Yields to 6-Week High

  • Fed referred to its December meeting in liftoff discussions
  • Two-year gilt yield climbs to highest level since September

U.K. government bonds fell for a second day, pushing 10-year gilt yields to the highest level in almost six weeks, after Federal Reserve officials resurrected speculation they will raise U.S. interest rates in December, a move many investors view as a precursor to a liftoff by the Bank of England.

Gilts slumped after the Fed dropped a reference to global risks and referred to its “next meeting” on Dec. 15-16 as it discussed the timing of an increase in a statement released Wednesday. The securities had been supported by bets the BOE would wait for a Fed move, with the two-year gilt yield sliding the most this year on Sept. 18, the day after U.S. officials’ previous policy announcement.

“The view on the Bank of England is it will move probably around six months after the Fed,” said Jason Simpson, a strategist at Societe Generale SA in London. “The fact that the Fed said that we’re potentially still on course for a rate hike this year has obviously put the skids under the front end in the U.S. and that’s been reflected in the U.K.”

Benchmark 10-year gilt yields jumped 13 basis points, or 0.13 percentage point, to 1.93 percent as of 4:25 p.m. London time, the highest since Sept. 18. The increase was the biggest since July 10. The 2 percent bond due in September 2025 fell 1.17, or 11.70 pounds per 1,000-pound ($1,530) face amount, to 100.665. The two-year yield climbed nine basis points to 0.63 percent and touched 0.64 percent, the highest since Sept. 21.

Net Sellers

Foreign investors reduced their gilt holdings for a second month in September, selling a net 3.2 billion pounds after unloading 4.1 billion pounds a month earlier, according to data published by the BOE.

Gilts are headed for a monthly decline as the speculation of a Fed rate move comes amid signs of U.K. economic expansion. House prices increased 0.6 percent from the previous month in October, growing the fastest in six months, according to Nationwide Building Society. Data released on Oct. 27 showed Britain’s economy grew 0.5 percent in the three months through September.

Even so, forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s 0.5 percent official bank rate won’t come until December 2016. Before the Fed’s September decision, pricing suggested an August liftoff.

The pound weakened 0.2 percent to 71.70 pence per euro. Sterling rose for the first time in three days versus the dollar, climbing 0.3 percent to $1.5301.

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