U.K. government bonds fell, with 10- year yields climbing above 2 percent for the first time since May, signaling the government of Prime Minister David Cameron will have to pay more to finance its budget deficit.
Gilts extended losses from yesterday when benchmark yields jumped the most since September as U.S. lawmakers reached a deal to avert tax increases and spending cuts, reducing demand for safer assets. U.K. borrowing costs increased today as the nation sold 3.75 billion pounds ($6.1 billion) of five-year notes. The pound weakened from a 16-month high against the dollar as U.K. reports showed British house prices fell last month and construction output contracted.
“It’s the milestone bit that’s being crossed today,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “Yields can go a lot higher but they can’t go that much lower, in that we’re coming from a very low starting point.”
The 10-year gilt yield rose seven basis points, or 0.07 percentage point, to 2.06 percent at 4:34 p.m. London time after reaching 2.07 percent, the highest level since May 2. The 1.75 percent bond due in September 2022 dropped 0.64, or 6.40 pounds per 1,000-pound face amount, to 97.28.
Benchmark yields, which jumped 16 basis points yesterday, will increase to 2.40 percent by year-end, according to the median estimate of economists surveyed by Bloomberg. The yield fell to a record 1.407 percent on July 23.
The U.K. sold five-year notes today at an average yield of 0.958 percent, compared with 0.787 percent at the previous auction of the securities on Nov. 20. Investors submitted bids for 2.11 times the amount sold, versus 1.59 times in November.
Five-year yields climbed five basis points to 1.01 percent in the secondary market after rising to 1.02 percent, the highest since May 10.
The breach of 2 percent in 10-year yields may have been triggered by automatic orders to sell the securities, said Orlando Green, a strategist at Credit Agricole Corporate & Investment Bank in London.
“Clearly it’s a big number if it’s gone through that, there may be little bit of some forced selling,” he said.
Gilts have underperformed their German counterparts since Standard & Poor’s lowered the outlook on Britain’s top credit rating to negative on Dec. 13, citing weak economic growth and a worsening debt profile.
The extra yield investors demand to hold 10-year gilts instead of bunds widened five basis points today to 59 basis points, from 49 basis points on Dec. 12.
Yields have moved in the opposite direction than suggested by a rating change 47 percent of the time, according to data compiled by Bloomberg in June on 314 upgrades, downgrades and outlook changes going back to 1974.
The pound dropped the most in almost two weeks against the dollar as Nationwide Building Society said the average cost of a home in Britain slipped 0.1 percent in December.
A U.K. construction index fell to 48.7 last month from 49.3 in November, Markit Economics said in a separate report. A reading below 50 signals contraction.
The U.K. currency weakened 0.6 percent to $1.6155 after appreciating to $1.6381 yesterday, the strongest since Aug. 30, 2011. Sterling was little changed at 81.15 pence per euro.
The pound has appreciated 1.5 percent in the past 12 months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.5 percent and the dollar weakened 2 percent.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at firstname.lastname@example.org