U.K. Inflation Outlook Drops to Three-Month Low as Oil Tumbles

  • Breakevens due in 10 years or less are attractive: SocGen
  • Consumer-price growth has been near zero since January

A gauge of the bond market’s outlook for U.K. consumer-price growth dropped to the lowest level since August as crude oil extended its decline into a sixth day, the longest losing streak in 18 months.

The five-year break-even rate, an indication of inflation expectations derived from the yield difference between U.K. government bonds and index-linked securities, fell for the fifth time in six days. While oil prices have plummeted, with Brent crude falling below $40 a barrel, there are some encouraging signs in the public’s perception of price growth.

Consumers’ one-year inflation expectations were unchanged from August and the outlook for five year’s time was slightly higher, according to a Bank of England survey.

“U.K. breakevens are very attractive now in sub-10 year maturities,” said Jorge Garayo, a fixed-income strategist at Societe Generale SA in London. “The market is reading inflation news too negatively for U.K. inflation. Global factors like energy are not helping, and true, the supermarket war is not helping either, but I am expecting that these turn the corner during 2016.”

U.K. government bonds advanced this week as the Bank of England didn’t move any closer to raising interest rates. Officials voted 8-1 to keep the benchmark rate at a record-low citing weak oil prices as a factor holding down inflation, as well as subdued wage growth. 

Consumer-price growth was negative for a second consecutive month in October and the annual inflation rate hasn’t risen above 0.1 percent since January. BOE officials have been reluctant to tighten policy with the rate so far below the central bank’s 2 percent target.

Five-year break-even rates fell four basis points, or 0.04 percentage point, to 2.15 percent as of 4:23 p.m. London time, having earlier touched 2.14 percent, the lowest since Aug. 28. Brent crude dropped 3.5 percent to $38.33 a barrel.

Benchmark 10-year gilt yields fell 10 basis points this week to 1.82 percent. The bonds extended gains Friday with U.S. Treasuries as investors flocked to safe assets after China’s central bank unveiled a new currency index, fueling speculation that the yuan will weaken further. The 2 percent bond due in September 2025 rose 0.895, or 8.95 pounds per 1,000-pound face amount, to 101.59.

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