U.K. Bonds Fall as PMI Data Bring Forward BOE Rate-Increase Bets

  • Forward contracts signal rates liftoff in November 2016
  • BOE officials meet to discuss new growth forecasts this week

U.K. Manufacturing PMI Surprises With 16 Month High

U.K. 10-year government bonds dropped for a fourth day as an unexpected surge in Britain’s manufacturing growth prompted investors to bring forward bets on the timing of the Bank of England’s first interest-rate increase since the financial crisis.

Monetary Policy Committee members meet in London this week to discuss new forecasts for growth and inflation, bolstering speculation that Governor Mark Carney may adopt a more hawkish tone. Ten-year gilt yields touched a six-week high and the pound reached its strongest level against the euro since August before erasing the advance.

“That stronger manufacturing number helped gilts visit the day’s lows,” said Jason Simpson, a strategist at Societe Generale SA in London. “We have the inflation report this week, MPC decision minutes. All of that is potentially a chance for the BOE to reiterate that rates could go up mid next year rather than the end of it” so gilts will continue to struggle, he said.

Benchmark 10-year gilt yields rose two basis points, or 0.02 percentage point, to 1.94 percent at 4:24 p.m. London time, and touched 1.96 percent, the highest since Sept. 17. The 2 percent bond due in September 2025 fell 0.17, or 1.70 pounds per 1,000-pound ($1,543) face amount, to 100.525.

Rate Outlook

Forward contracts based on the sterling overnight index average, or Sonia, indicated that a full 25 basis-point increase to the BOE’s official bank rate will come in November 2016. As recently as Oct. 30 the measure indicated it wouldn’t happen until after December 2016.

“The first hike was pushed right into 2017 for the BOE, so now with the U.S. pricing of the first hike brought forward, that’s caused the BOE to be brought forward too. The Fed was a little more hawkish than markets had expected and that puts greater focus on BOE,” Simpson said.

Markit Economics said manufacturing growth unexpectedly accelerated to the fastest in 16 months in October, with its purchasing managers’ index rising to 55.5 from a revised 51.8 in September, beating economists’ forecast. The index of new orders rose to the highest in 15 months, with a gauge of export demand also improving. A reading above 50 indicates growth.

Sterling weakened 0.2 percent to 71.48 pence per euro, having earlier appreciated 0.4 percent to 71.07 pence, the strongest level since Aug. 20. It posted its biggest monthly advance since January against the shared currency in October. The pound was little changed at $1.5430.

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