Gilts fall for 4th week on rate-hike thought

UK government bonds fell for a fourth week as signs the economy is gathering momentum fuelled speculation the Bank of England will raise interest rates sooner than policy makers forecast.

By Morgane Lapeyre And Lukanyo Mnyanda (Bloomberg)

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Published: Sun 18 Aug 2013, 10:35 PM

Last updated: Sat 4 Apr 2015, 7:50 AM

Benchmark 10-year yields climbed to the highest level since August 2011 as investors boosted wagers the central bank will increase its key rate before 2016, when policy makers anticipate unemployment will have fallen enough to justify higher borrowing costs. The pound strengthened for a second week against the dollar and euro. Sterling has been the best-performing major currency during the past six months.

“Until we hear some central bank comments come out trying to calm the markets, we’ll probably see this selloff continue” on expectation of higher rates, said Owen Callan, an analyst at Danske Bank in Dublin. “We’ve seen the first big move already and it may not be quite as volatile next week.”

The UK 10-year yield climbed 24 basis points, or 0.24 percentage points, this week to 2.70 per cent, the biggest increase since the period through June 21. The 1.75 per cent bond due September 2022 fell 1.875, or £18.75 per £1,000 ($1,561) face amount, to 92.385. The yield rose to 2.71 per cent on August 15, the highest since August 9, 2011.

Data last week showed retail sales rose more in July than economists forecast, while the rate for jobless claims dropped to the lowest since February 2009. Purchasing managers surveys of services, manufacturing and construction activity all improved in July, according to figures released this month.

Jobless rate

BoE Governor Mark Carney has pledged to refrain from raising borrowing costs until the unemployment rate falls to seven per cent, which policy makers don’t expect until at least the fourth quarter of 2016. Seventeen of 25 forecasters in a Bloomberg survey say unemployment will fall to that level by mid-2016, with 13 saying it will happen in 2015 at the latest.

The implied yield on short-sterling futures contracts expiring in September 2016 increased 38 basis points last week to 2.21 percent, signalling traders added to bets that borrowing costs will increase as the economy improves.

Gilts lost investors 4.6 per cent this year through August 15, according to Bloomberg World Bond Indexes show. German bunds dropped 2.4 per cent and Treasuries declined 3.4 per cent.

The pound climbed 0.8 per cent last week to $1.5621 after rising to $1.5657 on Friday, the highest since June 19. The UK currency appreciated 0.9 per cent to 85.28 pence per euro.

Sterling has appreciated four per cent in the past six months.

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