U.K. Gilts Drop on Fed as Morgan Stanley Prefers German Bunds

U.K. gilts fell, pushing 10-year yields up by the most since September, as the Federal Reserve’s decision to raise its U.S. growth outlook fueled bets central banks will refrain from announcing any more bond purchases.

Two-year notes dropped for a second day even after a government report showed the number of Britons claiming jobless benefits rose more than economists predicted. Morgan Stanley told its clients to favor German bunds over gilts on speculation the U.K. economy will recover faster than the euro area, reducing the likelihood of more quantitative easing from the Bank of England. The U.K. will sell 30-year bonds tomorrow.

“If we haven’t got the support from new QE, which is looking more 50-50, then yields can sell off in comparison to bunds,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “We have a 30-year option tomorrow, so the long end might be feeling a bit weaker.”

The 10-year gilt yield rose 17 basis points, or 0.17 percentage point, to 2.34 percent at 4:28 p.m. London time, the highest since Dec. 6. Yields rose by the most since Sept. 13 on a closing basis. The 4 percent bond due March 2022 fell 1.68, or 16.80 pounds per 1,000-pound ($1,567) face amount, to 114.64.

Two-year yields gained five basis points to 0.52 percent after reaching 0.54 percent, the most since Nov. 11.

‘Moderate‘ Growth

The Federal Open Market Committee said yesterday it expects “moderate economic growth” and predicted the unemployment rate “will decline gradually.” In its previous statement in January, policy makers said growth would be “modest” and unemployment “will decline only gradually.”

The announcement came after a U.S. report showed retail sales advanced 1.1 percent in February, the most in five months. The Treasury 10-year (USGG10YR) yield increased six basis points today to 2.19 percent.

The extra yield investors get for holding 10-year gilts instead of similar-maturity bunds was 39 basis points, up from 19 basis points a month ago. The U.K. bonds yield 10 basis points more than 10-year Treasuries.

Unemployment-benefit claims climbed by 7,200 from January to 1.612 million, the statistics office said in London. Economists surveyed by Bloomberg forecast a gain of 5,000. Unemployment (UKUEILOR) measured by International Labour Organization methods held at 8.4 percent in the three months through January, the highest since 1995.

Pound Gains

The pound rose 0.3 percent to 83.08 pence per euro after advancing to 82.95 pence, the strongest since Feb. 17. The U.K. currency lost 0.2 percent to $1.5677.

Britain is proposing to revive “perpetual gilts” to allow the government to borrow for as long as possible at record-low rates, according to two people familiar with budget discussions.

Chancellor of the Exchequer George Osborne will use his March 21 budget to announce a consultation on introducing government bonds of up to 100 years and reviving debt with no fixed maturity, the people said.

Such securities “offer certainty and balance to arguably more volatile assets, such as corporate bonds and equities, and there will be demand from banks and pension funds,” Mike Turner, head of strategy at Aberdeen Asset Management in Edinburgh, wrote in a note to clients. “But history has also shown that when debt issuers attempt to lock in such low levels of short term interest rates in perpetuity or for extremely long periods, that it could be a sign of the bottoming out of the interest-rate cycle.”

The 10-year gilt yield is almost two percentage points below its 4.21 percent average for the past decade, according to data compiled by Bloomberg. The yield declined to a record 1.92 percent on Jan. 18.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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