U.K. Bonds Slump as Demand Falls at Auction on Fed; Pound Rises

U.K. government bonds slumped, pushing 10-year (USGG10YR) yields to the highest in more than a year, after Federal Reserve Chairman Ben S. Bernanke said yesterday that policy makers may end monetary stimulus as early as mid-2014.

Five-year gilt yields climbed to the highest in more than 19 months as investor demand for the securities declined to the lowest since June 2012 at a 4.75 billion-pound ($7.3 billion) auction of the debt. Two-year (GUKG2) rates jumped as a report showed retail sales increased more than economists forecast in May, weakening the case for further asset purchases by the Bank of England. The pound strengthened from the lowest level in three weeks versus the euro.

“Yields are rising everywhere,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The gilt market is following on that front. There’s still a lot of uncertainty around about how much central banks will deliver going forward in terms of keeping this ultra-loose monetary policy.”

Benchmark 10-year gilt yields rose 17 basis points, or 0.17 percentage point, to 2.30 percent at 4:44 p.m. London time, after increasing to 2.32 percent, the highest since March 27, 2012. The 1.75 percent bond due September 2022 tumbled 1.335, or 13.35 pounds per 1,000-pound face amount, to 95.48.

Two-year yields climbed six basis points to 0.5 percent after reaching 0.57 percent, the most since Nov. 3, 2011.

Bernanke said the Fed may “moderate” its $85 billion in monthly purchases, known as quantitative easing, later this year if economic growth is consistent with its forecasts.

Treasury Yields

The yield on Treasury 10-year notes rose as much as 12 basis points to 2.47 percent, the highest since Aug. 8, 2011. The rate jumped yesterday by the most since October 2011.

Gilts, together with Treasuries and German bunds, have been supported since the financial crisis erupted in 2007 as investors sought haven assets. They extended gains after Greece’s admission in 2010 that it had understated its budget deficit sparked a bond selloff in the euro area.

Central banks from the Fed to the Bank of Japan cut interest rates to record lows. The Bank of England has a 375 billion target for asset purchases.

The U.K. 10-year gilt yield, which fell to a record low 1.41 percent in July, is still about 1.59 percentage point less than its average over the past decade. It rose as high as 5.56 percent in July 2007.

Treasury 10-year yields are about 1.20 percentage point below their mean level since June 20, 2003. Similar-maturity German bunds yielded 1.67 percent today, compared with a 10-year average of 3.26 percent.

Gilt Auction

The U.K. sold five-year gilts at an average yield of 1.422 percent today, the Debt Management Office said. Investors bid for 1.33 times the amount of securities on sale, down from a bid-to-cover ratio of 1.78 at a previous auction on May 14. That’s the lowest since June 12, 2012, according to data compiled by Bloomberg.

The securities were allotted at 0.967 percent in May, compared with a record-low 0.787 percent set at an auction on Nov. 20.

Five-year gilt yields climbed 21 basis points to 1.44 percent after reaching 1.48 percent, the highest level since Oct. 28, 2011.

“It was very disappointing, and is a reflection of the current negative sentiment,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh, referring to the auction result. “The hawkish statement by Bernanke has clearly unnerved markets and we’ve seen as U.S.- driven selloff.”

Sales Climb

U.K. sales including auto fuel jumped 2.1 percent from April, when they fell a revised 1.1 percent, the Office for National Statistics said. The median forecast of 23 economists in a Bloomberg News survey was for a 0.8 percent increase.

The data add to signs the economic recovery is under way, though consumers remain under pressure as inflation outpaces pay growth and government spending cuts bite.

Bank of England policy makers voted 6-3 to keep their asset-purchase target unchanged this month, the minutes of their June 5-6 meeting published yesterday showed.

U.K. gilts have handed investors a loss of 1.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 0.9 percent and Treasuries declined 1.8 percent, the indexes show.

The pound gained versus all but two of its 16 major counterparts.

The U.K. currency strengthened 0.5 percent to 85.44 pence per euro after depreciating to 85.91, the weakest since May 30. Sterling fell 0.2 percent to $1.5452 after sliding to $1.5415, the lowest since June 6.

The pound has appreciated 4.4 percent in the past three months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.1 percent and the dollar advanced 1.8 percent.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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

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