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U.K. Gilts Post Weekly Gain Amid Signs Economic Recovery May Be Slowing
U.K. 10-year government bonds posted a weekly gain, driving the yield down by the most since June, after reports added to evidence that the economic recovery is sputtering, making interest rate increases less likely.
Gains yesterday wiped out a monthly decline and pushed the 10-year yield to the lowest in a week after a report showed consumer confidence fell more than economists forecast in July. House prices fell this month and banks approved fewer mortgages than economists forecast in June, separate reports showed this week. There’s a “considerable” way to go before rates return to “normal,” central bank Governor Mervyn King said July 28.
“The growth and inflation outlook argues for further gilts outperformance,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The growth differential is something that will support” gilts, he said.
The 10-year yield decreased 12 basis points this week to 3.33 percent as of 4:40 p.m. in London yesterday. That was the biggest weekly decline since the yield fell 16 basis points in the week ended June 25. The two-year yield was at 0.77 percent, down from 0.88 percent on July 23.
Investors are betting that Prime Minister David Cameron’s plans to slash the U.K. budget deficit will hinder the U.K. recovery from the worst recession on record while making it more likely that the country will keep its AAA credit rating. 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.
‘Constructive on Gilts’
U.K. bonds outperformed their German peers in July, with the spread between 10-year gilts and similar maturity bunds narrowing to 65 basis points yesterday, from 78 basis points on June 30. The spread narrowed from 103 basis points on May 7, the most since October 2005
“With fiscal consolidation, the government’s contribution to growth will not last,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “I remain constructive on gilts in terms of outright direction.”
Gilts may extend gains next week on speculation reports will show growth in the country’s manufacturing industry slowed this month. An index of manufacturing slipped to 57 in July from 57.5 a month before, according to a Bloomberg survey before the data is released on Aug. 2.
Gilts returned 5 percent this year through July 29, compared with a gain of 6 percent for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries handed investors 6.3 percent.
The pound gained for a third consecutive week, strengthening 1.7 percent to $1.5696. It was at 83.09 pence per euro, from 83.72 pence on July 23.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
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