Bonds round-up: Stable UK rates expected

Date: Tuesday 16 Feb 2010

UK gilts are rising on the back of comments by governor of the Bank of England Mervyn King. He reiterated that the recent jump in inflation is only temporary. That means that UK interest rates are not expected to rise.

Inflation went past 3% last month to its highest since November 2008 following the January 1 VAT hike back to 17.5% and a rise in petrol prices. Consumer Price Inflation (CPI) was up 3.5% year-on-year in January, matching forecasts, although it fell 0.2% month-on-month versus predictions of a small gain.

“We believe consumer price inflation could well be back under 2% by the end of the year and then largely stay there during 2011 unless VAT is raised to 20% as part of fiscal tightening measures”, says Howard Archer, chief UK economist at IHS Global Insight.

Two-year gilt yields are three basis points lower at 1.16%, while ten-year yields have slipped by a similar amount to 4.04%.

US Treasury bonds are on the slide after yesterday’s public holiday.

Longer-dated bonds are falling more sharply than shorter-dated ones. Two-year yields are barely one basis point higher at 0.83%, while ten-year yields are nearly two basis points ahead at 3.71%.

In December, China cut its holdings in US government debt to its lowest level since February 2009. China sold a net $34.2bn of US bonds in December, with Japan buying $11.5bn net.

European markets have been hit by rumours the Spanish government is planning a huge bond issue.

German bunds are barely changed with two-year yields at 0.97% and ten-year yields steady at 3.21%.

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