U.K. Gilts Decline Before Debt Auctions; Pound Gains Versus Euro

U.K. 10-year gilts fell, pushing yields toward a 10-week high, before the Debt Management Office sells inflation-linked and conventional bonds this week and amid signs the U.K. economy is emerging from recession.

Gilts dropped before the debt office sells 1.25 billion pounds ($2 billion) of index-linked securities due in 2034 tomorrow and 3.25 billion pounds of 10-year bonds two days later. Data tomorrow will show the U.K. trade deficit shrank in July, according to a Bloomberg News survey of economists. A labor market report will show that unemployment stayed at the lowest rate in over a year, according to a separate survey. The pound rose for the first time in four days against the euro.

Gilts have fallen because “there is plenty of U.K. supply around this week with the linker tomorrow and the conventional later in the week,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

Benchmark 10-year yields rose five basis points, or 0.05 percentage point, to 1.74 percent as of 4:40 p.m. London time. The rate climbed to 1.804 percent on Sept. 7, the highest level since June 29. The 1.75 percent bond maturing in September 2022 fell 0.46, or 4.60 pounds per 1,000-pound face amount, to 100.14.

The U.K. last sold 10-year gilts on July 12 at a record-low auction yield of 1.72 percent. Investors bid for 2.2 times the amount of securities allotted.

Gilts have returned 3.5 percent this year through Sept. 7, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which gained 2.8 percent, and U.S. Treasuries, which earned 2.1 percent.

U.K. Data

Reports released last week showed U.K. service activity expanded more than economists forecast and industrial production surged the most in 25 years.

Data due tomorrow will show the U.K. trade deficit shrank to 9 billion pounds in July, from 10.1 billion pounds the month before, according to the median estimate of 20 analysts in a Bloomberg News survey. A labor market report the next day will show the unemployment rate stayed at 8 percent, the lowest since July 2011, according to a separate survey.

The pound appreciated 0.2 percent to 79.92 pence per euro after declining to 80.11 pence, the weakest level since July 5. Sterling was little changed at $1.6010, having strengthened to $1.6034 at the end of last week, the most since May 15.

Risk Reversal

Three-month options show that the premium for puts, which grant the right to sell the euro versus the pound, over calls, which confer the right to buy, shrank to the least since July 2011.

The gap between the so-called 25-delta risk reversal rates reached minus 0.375 percentage points.

Risk reversals measure the difference between implied volatility, or a gauge of price and demand, on similar puts and calls. Traders pay a premium for puts when they expect a currency to decline.

The U.K. currency will end the year at $1.55, according to the median of 48 analyst estimates compiled by Bloomberg, down from a prediction of $1.59 in May. It last traded at $1.55 on Aug. 2 and has strengthened 4.9 percent from a near five-month low of $1.5269 on June 1.

The pound has gained 0.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 1.7 percent and the euro rose 2.9 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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