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U.K. government bonds rise as GDP Data support view for low interest rates

By Tajuddin
Jan 27th, 2015
The renewed focus on data will also see volatility rise in the British pound

The renewed focus on data will also see volatility rise in the British pound

London ( Bloomberg + DIPLOMAT.SO) – U.K. government bonds advanced as a report showing Britain’s economy grew at the slowest pace in a year strengthened the case for the Bank of England to keep interest rates at a record low for longer.

The pound fell for the first time in four days against the euro as the data showed growth slowed more in the fourth quarter than analysts forecast. A measure of U.K. inflation expectations reached the lowest level in 2 1/2 years. A slowdown in consumer-price growth prompted members of the BOE’s Monetary Policy Committee to vote unanimously to keep interest rates on hold this month.

“Gilts should broadly remain very well supported,” said Daniela Russell, U.K. rates strategist at Credit Suisse Group AG in London. “Today’s data came in slightly weaker than the consensus expectation, but is still consistent with a decent pace of growth.”

Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 1.49 percent as of 12:12 p.m. London time. The 2.75 percent bond due in September 2024 rose 0.205, or 2.05 pounds per 1,000-pound ($1,508) face amount, to 111.23. The rate touched 1.44 percent on Jan. 23, the lowest level since August 2012.

The Office for National Statistics’ report showed the U.K. economy grew 0.5 percent in the fourth quarter after expanding 0.7 percent in the three months through September. The median forecast of analysts in a Bloomberg News survey was for growth of 0.6 percent.

Inflation Outlook

The 10-year break-even rate, a measure of the outlook for retail-price inflation derived from the difference in yield between gilts and inflation-linked securities, dropped four basis points to 2.35 percentage points, the lowest since August 2012.

BOE members Martin Weale and Ian McCafferty dropped their call for an interest-rate increase as plunging oil prices raised the risk that slow inflation would become entrenched, according to minutes from the Jan. 7-8 policy meeting. Annualized inflation cooled to 0.5 percent in December, matching a record low.

“For the MPC, they are waiting for inflation to bottom,” Credit Suisse’s Russell said. “Given how widespread low inflation is, the concerns they have that it feeds into inflation expectations and therefore poses downside risk to medium-term inflation are very real. There is no hurry for them at the moment” to raise rates.

Rate Expectations

Forward contracts showed investors are betting the sterling overnight interbank average, or Sonia, will rise to 0.539 percent at the BOE’s December policy meeting, from 0.436 percent next month. The benchmark interest rate has been at a record-low 0.5 percent since March 2009.

The pound erased a gain versus the dollar after the GDP report.

“The data was a little bit weaker than expected but the most important thing when you look at sterling right now is that you have very flat rate expectations when it comes to the Bank of England,” said Manuel Oliveri, a foreign-exchange strategist at Credit Agricole SA’s corporate and investment banking unit in London. “The market is not pricing in anything that’s why such data is not having any big impact on the currency right now. Much further weakness would be needed in order to make a case for rising easing expectations.”

Sterling weakened 0.3 percent to 74.72 pence per euro. The pound was little changed at $1.5095 after earlier gaining as much as 0.3 percent.

The pound won’t decline past $1.48 and these levels are a buying opportunity on a medium-term perspective, Credit Agricole’s Oliveri said. Credit Agricole recommends selling euro-pound at 74.70 pence, with a target of 71.50 pence.

The U.K. Debt Management Office may sell inflation-linked gilts due in March 2058 via banks on Wednesday, according to a person familiar with the matter. Books are expected to open at 9 a.m. on that day, subject to market conditions, the person said.

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