U.K. government bonds declined, sending the 10-year gilt yield above 2 percent for the first time since March, even as an industry report showed retail sales fell the most in 16 months in May.
Sterling rose from an 11-week low versus the dollar. Two-year gilt yields climbed to highest since January as the Debt Management Office sold 1.75 billion pounds ($2.65 billion) of securities due in 2015 in a so-called mini-tender. U.K. bonds failed to keep pace with losses on Treasuries, with the yield difference between 10-year debt widening to the most since September 2006 amid speculation the Federal Reserve will taper its stimulus sooner than the Bank of England.
“While gilts are outperforming Treasuries because of speculation that the Fed will sooner rather than later fade out its stimulus, bond yields in core markets are being driven higher by the perception that the Fed will lead the way and other central banks will probably follow,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Any data that shows improvement in the U.K.’s fragile economy will underpin yields.”
Benchmark 10-year gilt yields rose four basis points, or 0.04 percentage point, to 2 percent at 4:24 p.m. London time, after rising to 2.03 percent, the highest since March 11. The 1.75 percent security slid 0.3, or 3 pounds per 1,000-pound face amount, to 97.905.
The yield on two-year gilts added one basis point to 0.38 percent after reaching 0.4 percent, the highest since Jan. 23.
A gauge of annual sales growth in the U.K. dropped to minus 11, the lowest since January 2012, from minus 1 in April, the Confederation of British Industry said. Economists had forecast an increase to 3, according to the median of 12 estimates in a Bloomberg News survey.
The U.K. sold 4.75 percent gilts maturing in September 2015 at an average yield of 0.375 percent, up from 0.304 percent at a previous auction of the same securities on Oct. 30.
The yield spread between Treasury 10-year notes and similar-maturity gilts narrowed by six basis points to 15 basis points after widening to 21 basis points, the most since September 2006. The Treasury 10-year yield fell two basis points to 2.15 percent after climbing 16 basis points yesterday, the biggest increase since October 2011.
Government bonds around the world are headed for their steepest monthly loss in almost a decade as signs the U.S. economy is recovering hardened speculation the Fed will trim its debt purchases.
Securities in the Bank of America Merrill Lynch Global Broad Market Index have fallen 1.3 percent in May, poised for the steepest loss since April 2004.
Gilts lost 2.1 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.4 percent and U.S. Treasuries declined 2.1 percent.
The pound may weaken to a four-year low of $1.37 during Mark Carney’s tenure at the Bank of England, according to Michael Amey, a London-based money manager at Pacific Investment Management Co.
The incoming governor, who takes over from Mervyn King in July, will want to see the currency decline, so the “clearest trade” is to sell the pound, Amey said in an interview today.
Sterling can depreciate “on a trade-weighted basis, probably another 10 to 15 percent,” Amey told reporters at a media briefing in London today. “I don’t think $1.37 is a big ask.” The U.K. currency last traded at that level in March 2009.
The pound rose 0.4 percent to $1.5106 after falling to $1.5009, the least since March 14. The U.K. currency weakened 0.2 percent to 85.66 pence per euro.
Sterling has dropped 3 percent this year, the third-worst performer after the yen and Australian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. currency gained 5.1 percent and the euro strengthened2.9 percent.
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