U.K. Yield Curve at Steepest in 11 Months Before Auction

The yield difference between U.K. two- and 10-year government bonds widened to the most in almost 11 months before the nation auctions the longer-maturity debt this week.

The pound dropped to seven-month low versus the dollar before the Bank of England releases the minutes of its February meeting tomorrow and the U.K. issues unemployment data. The Monetary Policy Committee kept its main interest rate at a record-low 0.5 percent when it met on Feb. 7. U.K. gilts are the worst-performing sovereign debt this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

“With the front end anchored by low rates, the curve steepens when the market sells off,” said Jason Simpson, a fixed-income strategist at Banco Santander SA in London. “Obviously it is slightly unusual today in that yields are lower but the curve steeper, so the performance of 10-year bonds must be inhibited by Thursday’s auction.”

The 10-year gilt yield dropped one basis point, or 0.01 percentage point, to 2.19 percent at 4:35 p.m. London time after climbing to 2.27 percent on Feb. 14, the highest since April 2. The price of the 1.75 percent gilt due in September 2022 gained 0.09, or 90 pence per 1,000-pound ($1,542) face amount, to 96.275.

The yield spread between the bonds and two-year securities was little changed at 188 basis points, after widening to 190 basis points, the most since March 22.

The Debt Management Office is due to auction 2.25 billion pounds of the 10-year securities on Thursday.

Worst Performer

U.K. government bonds lost 2.8 percent this year through yesterday, the worst performer of the 26 Bloomberg/EFFAS indexes. German bonds dropped 1.5 percent and Treasuries fell 0.9 percent.

Sterling weakened for a second day versus the euro after central bank policy maker Martin Weale endorsed the currency’s decline, saying on the weekend it may help bolster exports.

The pound dropped 0.3 percent to $1.5425 after falling to $1.5416, the lowest since July 13. It weakened 0.4 percent to 86.70 pence per euro after depreciating 0.3 percent yesterday.

U.K. jobless claims declined by 5,500 from December, when they dropped 12,100 to 1.56 million, the lowest since June 2011, according to the median estimate of economists surveyed by Bloomberg News. The London-based Office for National Statistics will release the data tomorrow.

“You could argue the majority of the negativity has been priced in,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “However, if we see more bad news from the unemployment numbers then that could be another catalyst for a weaker sterling.”

The pound has fallen 5 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.7 percent and the euro rose 2.3 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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