BLBG:U.K. Inflation Bonds Surge on RPI as Pound Advances Before BOE
U.K. inflation-linked bonds advanced, pushing 10-year yields to an all-time low, after the Office for National Statistics said it will maintain its formula for calculating the retail price index.
The pound strengthened against the dollar before Bank of England policy makers announce the result of their monthly meeting. The Monetary Policy Committee will keep the benchmark interest rate at a record-low 0.5 percent and the asset-purchase target at 375 billion pounds ($602 billion), separate Bloomberg News surveys of economists show, before the decision is announced at noon in London. Conventional gilts ended a three- day advance.
“There’s no breach of contract from a legal or financial perspective and that is good for confidence in Great Britain as a place to do business,” said Andrew Bosomworth, managing director at Pacific Investment Management Co., in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “A change of the contract could have consequences, obviously, as today’s price action suggests.”
The U.K. 10-year inflation-linked yield tumbled to a record-low minus 0.99 percent. The rate was 29 basis points lower at minus 0.91 percent as of 10:48 a.m. London time. A negative yield means investors buying the securities will receive payments below the retail-price index if they are held to maturity.
The 10-year conventional gilt yield climbed three basis points, or 0.03 percentage point, to 2.05 percent, after falling 10 basis points over the past three days. The 1.75 percent bond due in September 2022 dropped 0.225, or 2.25 pounds per 1,000- pound face amount, to 97.38.
Break-Even Rate
The U.K. 10-year break-even rate, the difference in yield between conventional gilts and inflation-protected securities, had its biggest intraday gain since Bloomberg began collecting the data in 1992, widening as much as 34 basis points to 300 basis points.
The pound rose 0.2 percent to $1.6053. It fell to $1.5993 yesterday, the lowest level since Nov. 30. Sterling slipped 0.1 percent to 81.62 pence per euro, after depreciating to 81.69 pence, the weakest level since Dec. 31.
The U.K. currency has fallen 0.7 percent in the past week, the second-worst performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen dropped 1.3 percent.
The statistics office will develop a new inflation index known as RPIJ to adjust the measurement of clothing prices in the RPI, the Office for National Statistics said in London.
U.K. inflation-linked bonds, which pay investors based on changes in the retail-price index, had underperformed conventional securities this month amid concern adjustments to the retail-price gauge would dent returns.
U.K. index-linked securities handed investors a 3 percent loss this year through yesterday, after making a 0.8 percent return in 2012, according to indexes compiled by Bank of America Merrill Lynch. Conventional gilts lost 1.4 percent in 2013. They returned 2.8 percent last year.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
