BLBG: U.K. Bonds Jump as Inflation Falls Below BOE Target
U.K. government bonds advanced for a second day after a report showed inflation slowed to below the Bank of England’s target in January for the first time since November 2009.
Short-sterling futures also jumped, indicating investors were reducing bets on higher borrowing costs. The pound weakened for a second day against the euro after Bank of England policy maker David Miles said yesterday that Britain’s economy probably has more spare capacity than the central bank’s main calculations show and inflation pressures are “subdued.” Sterling was little changed against the dollar after reaching a four-year high yesterday.
“The gilt market liked the inflation number,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London. “Inflation pressures are still very muted and the strong exchange rate is playing into this.”
The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 2.75 percent at 12:08 p.m. London time. The 2.25 percent bond maturing in September 2023 rose 0.23, or 2.30 pounds per 1,000-pound ($1,669) face amount, to 95.795.
The 10-year yield may fall to 2.5 percent by the end of March, Marshall said.
Inflation Expectations
Consumer prices rose 1.9 percent last month from a year earlier, the U.K. statistics office said today. Economists had forecast the rate to hold at 2 percent, matching the central bank’s target. It’s down from as high as 5.2 percent in September 2011. Slower inflation preserves the value of fixed payments on bonds.
The implied yield on the short-sterling futures contract expiring in December fell four basis points to 0.76 percent. Volumes on the futures contracts jumped to a record on Feb. 12, when Bank of England Governor Mark Carney laid out a set of indicators that will help determine changes in central-bank monetary policy.
The retail-price index, the benchmark for U.K. inflation-linked bonds, rose to 2.8 percent, exceeding analyst estimates for a 2.7 percent reading.
The 10-year break-even rate, a gauge of market inflation expectations derived from the yield difference between gilts and inflation-linked securities, was little changed at 2.97 percent. It’s fallen 16 basis points this year on signs of slowing inflation in developed nations. Consumer prices in Sweden dropped an annual 0.2 percent, according to data released today, and a report on Jan. 31 showed euro-area consumer-price inflation cooled to 0.7 percent in January.
Economic Slack
The amount of slack is “toward the upper end” of the 1 percent to 1.5 percent of gross domestic product estimated by the central bank in its Inflation Report on Feb. 12, the BOE’s Miles said yesterday. “It’s possible that there is more than that,” he said. Minutes of the Monetary Policy Committee’s February meeting are due for release tomorrow.
The Bank of England last week lowered its forecast for inflation while raising its projections for growth, and the changes in view on prices were informed by currency movements, Miles said yesterday.
“Inflation is not just at the target level but is likely to stay around that level for some time,” he said. “If our best guess is that inflation will stay around the target level and there is slack, we would want to start using up that slack.”
Pound Slips
The pound weakened 0.3 percent to 82.26 pence per euro, after appreciating to 81.58 pence yesterday, the strongest level since January 2013. The U.K. currency was at $1.6688 after rising to $1.6823 yesterday, the highest since November 2009.
“With pound-dollar testing four-year highs yesterday, a soft inflation number was always going to cause a wobble in the pound,” said Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura International Plc in London. “The theme of the day continues as sterling is sold in reaction to the inflation data.”
Sterling gained 12 percent in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 5.7 percent, while the dollar strengthened 2.5 percent.
U.K. gilts returned 1.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 1.8 percent and U.S. Treasuries gained 1.6 percent.
To contact the reporter on this story: Eshe Nelson in London at enelson32@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
