U.K. government bonds rose for the first time in six days as Prime Minister David Cameron’s prediction of a difficult year for the economy spurred demand for benchmark yields near the highest since April.
The pound weakened for a second day versus the euro after Cameron said on BBC Television yesterday the economic environment is “tough” and “Britain needs low interest rates.” The 10-year gilt yield jumped 30 basis points last week, the biggest increase since the five-day period ended January 23, 2009. The Bank of England meets this week to review monetary policy.
“The selloff last week, which was not unprecedented but very significant, has left the market somewhat oversold,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “Ten-year yields broke 2 percent last week and they may struggle to get back through that level.”
The 10-year gilt yield fell three basis points, or 0.03 percentage point, to 2.09 percent at the 5 p.m. close of trading in London after climbing to 2.14 percent on Jan. 4, the highest level since April 30. The 1.75 percent bond due September 2022 gained 0.29, or 2.90 pounds per 1,000-pound ($1,608) face amount, to 97.08.
Convincing overseas investors they should keep buying U.K. government debt is ultimately more important than whether ratings companies downgrade gilts, Cameron said on BBC Television’s “Andrew Marr Show.” Standard & Poor’s last month lowered its outlook on Britain’s top credit grade to negative, citing weak economic growth and a worsening debt profile.
“The real test is what are the interest rates the rest of the world is demanding in order to own your debt,” Cameron said. “Our interest rates are extremely low, the lowest they’ve been really for centuries.”
The benchmark 10-year gilt yield dropped to 1.407 percent on July 23, the lowest since Bloomberg began compiling data on the securities in 1989.
The relative-strength index on the gilt futures contract expiring in March dropped to 25.9 on Jan. 4, the lowest on a closing basis since Dec. 19 and below the 30 level that some traders view as a signal that an asset’s price has fallen too fast. The 14-day RSI increased to 31.3 today.
Gilts handed investors a loss of 2.2 percent this month through Jan. 4, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, after returning 2.8 percent in 2012.
Sterling weakened 0.2 percent to 81.47 pence per euro after sliding 0.4 percent on Jan. 4. The pound was little changed at $1.6078 after falling as much as 0.3 percent to $1.6021.
An index of job security published by Lloyds Banking Group Plc today dropped 4 points in December to minus 22, the lowest reading since February. A measure of consumers’ inflation expectations rose to the highest since February 2011.
Deputy Prime Minister Nick Clegg said he’s confident the British economy is healing after suffering a double-dip recession and the government is taking the right steps to narrow the budget deficit and fix the banking system.
“I am confident we are doing the right things to tackle the black hole in the public finances,” he told reporters in London. “Of course we want the healing process to take place faster, but look at the headwinds we’re having to deal with,” such as the euro crisis and consumer debt, he said.
The pound may weaken this year as the Bank of England reconsiders its bond-buying policy and as the U.K. faces a possible rating downgrade, according to David Bloom, the London- based global head of currency strategy at HSBC Holdings Plc.
“The currency has been remarkably impervious to bad news on economic activity, the fiscal challenge and monetary easing over the last few years, but we believe this is about to change,” Bloom wrote in a report published on Jan. 4. “Fiscal credibility is under threat at a time when the real pain of adjustment is only beginning.”
The U.K. currency will depreciate to 89 pence per euro by year-end and to 93 pence by the end of 2014, HSBC forecasts.
Bank of England policy makers will keep the benchmark interest rate at a record-low 0.5 percent and the asset-purchase target at 375 billion pounds when they meet on Jan. 10, according to economists surveyed by Bloomberg.
The pound has weakened 0.4 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 2.6 percent and the dollar fell 4.5 percent.
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