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U.K. Gilts Advance as House Price Declines Point to the Recovery Stalling
U.K. government bonds rose as a report showing house prices fell this month added to evidence that the economic recovery may stall and prevent the central bank from raising interest rates.
The gains pushed the 10-year yield down by the most in more than two months and pared July’s increase to 3 basis points. The average cost of a home decreased 0.5 percent from a month earlier, Nationwide Building Society said today. There may be a “considerable” way for the central bank to go before rates return to “normal,” Bank of England Governor Mervyn King said yesterday. U.K. banks approved fewer mortgages than economists forecast in June, central bank data showed today.
“If it’s not time to put the foot on the brakes, then it’s hard to be bearish gilts,” said Kenneth Broux, a senior market economist at Lloyds Banking Group Plc in London. “In my mind, rates are not going anywhere before year-end.”
The 10-year yield decreased nine basis points to 3.4 percent as of 5:08 p.m. in London. That was the biggest drop in the yield since May 19 based on closing prices. The yield climbed to 3.53 percent on July 27, the most since June 21. The 4.75 percent security maturing March 2020 gained 0.9, or 9 pounds per 1,000-pound ($1,559) face amount, to 110.89. The two- year yield fell nine basis points 0.82 percent.
The pound was little changed at $1.5602 and slipped 0.7 percent to 83.86 pence.
Gilts returned 4.5 percent this year, compared with a gain of 5.9 percent for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries handed investors 6.1 percent.
Gilts Outperform
U.K. lenders granted 47,643 loans to buy homes, compared with 49,461 in May, the Bank of England said today in London. That’s the lowest in four months and below the 48,800 median prediction of 18 economists in Bloomberg News survey.
Gilts outperformed their German peers as a report showed European confidence in the economic outlook rose to the highest in more than two years in July. An index of executive and consumer sentiment in the 16 euro nations rose to 101.3 from 99 in June, the European Commission in Brussels said today.
The extra yield, or spread, investors demand to hold 10- year gilts instead of similar maturity bunds narrowed three basis points to 71 basis points. Gilts also rose relative to 10- year Treasuries, pushing the spread down by five basis points to 45 basis points.
Investors are favoring gilts on bets that a flagging recovery will help keep inflation within the government’s 3 percent upper limit. The U.K. economy will probably expand by 1.2 percent this year, trailing behind 3.1 percent in the U.S. and 2 percent in Germany, according to Bloomberg surveys of economists.
The central bank has cut its benchmark rate to a record low of 0.5 percent and bought 200 billion pounds of government bonds to further depress borrowing costs.
The 10-year breakeven rate, which measures the yield difference between regular and index-linked bonds and anticipates consumer-price growth in the U.K. during the next decade, was at 267 basis points today, down from a 2010 high of 325 basis points in April.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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