BLBG: U.K. Government Bonds Advance as Goldman Sees Rate-Boost Delay
U.K. government bonds advanced as Goldman Sachs Group Inc. pushed back its forecast for Britain’s first interest-rate increase since 2007, citing worsening growth and the outlook for inflation.
The pound rose from close to a 14-month low versus the dollar as a report showed euro-area manufacturing and services expanded at the slowest pace in 16 months, adding to concern the economic slump in Britain’s biggest trading partner is deepening. That overshadowed data showing U.K. retail sales rose at the fastest pace in six months. Goldman predicted the Bank of England will raise its benchmark rate by 25 basis points in the fourth quarter of next year, compared with the first quarter in a previous forecast.
“There’s still not enough inflationary pressure to stoke up the hawks within the Monetary Policy Committee” at the BOE, said Peter Osler, head of rates strategy at Marex Spectron in London. “The pick-up in retail-sale volumes comes down to discounting, as we have price wars in the supermarkets. Short-dated gilts will continue to be underpinned expectations that rates will stay low for longer.”
Ten-year gilt yields declined four basis points, or 0.04 percentage point, to 2.10 percent, at 1:28 p.m. London time. The 2.75 percent bond due in September 2024 rose 0.385, or 3.85 pounds per 1,000-pound ($1,570) face amount, to 105.74.
The volume of retail sales including auto fuel jumped 0.8 percent in October from the previous month, when it fell 0.4 percent, the Office for National Statistics said in London today. Economists forecast a 0.3 percent increase, according to the median estimate in a Bloomberg News survey. Sales excluding fuel also rose 0.8 percent on the month.
Price Deflator
Prices as measured by the retail-sales deflator fell an annual 1.5 percent in October, the biggest decline since 2002. Prices of auto fuel dropped 4.3 percent to the lowest level since 2010.
The BOE cut its growth forecasts for 2015 last week in its quarterly Inflation Report, citing “moribund” global expansion and stagnation in Europe. Governor Mark Carney said in an interview with an Australian newspaper earlier this week that the U.K. has “huge disinflationary forces coming” from its trade partners.
“Recent data and communications from the Bank of England suggested policy makers are not in a rush to raise interest rates,” said Roberto Mialich, senior Group-of-10 foreign-exchange strategist at UniCredit SpA in Milan. “You need a big data shock to change that well-entrenched market perception, and the retail sales figure today was not it. The pound is more likely to fall than to rise in the near term.”
Pound Advance
The pound advanced 0.2 percent to $1.5705, after falling by as much as 0.3 percent to $1.5632 earlier. The U.K. currency slid to $1.5590 yesterday, the lowest since Sept. 6, 2013. Sterling strengthened 0.2 percent to 79.88 pence per euro, having reached 80.39 pence yesterday, the weakest level since Oct. 15.
The yield on index-linked bonds maturing in November 2042 dropped two basis points to minus 0.50 percent after the Debt Management Office sold 900 million pounds of the securities at a real yield of minus 0.497 percent.
Index-linked bonds are outperforming nominal gilts this year, returning 13 percent compared with the latter’s 10 percent gain, according to Bank of America Merrill Lynch Bond Indexes.
While the U.K.’s inflation rate has stayed below the Bank of England’s target of 2 percent since January, demand for index-linked securities was underpinned by the pension fund industry, which seeks to protect liabilities against a long-term increase in the cost of living.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Todd White, Keith Jenkins
