U.K. 10-year government bonds fell for the first time in five days before the Bank of England releases the minutes of its September policy meeting tomorrow.
Benchmark 10-year yields rose toward the highest level since July 2011, having climbed about half a percentage point since Mark Carney became central bank governor on July 1 and introduced a policy of interest-rate guidance. The extra yield investors demand to hold 10-year gilts instead of equivalent U.S. Treasuries widened for the first time in four days. The pound was little changed after a government report showed inflation slowed in August.
“Investors are demanding a higher premium on gilts compared to Treasuries,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. The market remains uncertain about “how the BOE sets monetary policy over the medium term.”
The 10-year gilt yield rose six basis points, or 0.06 percentage point, to 2.94 percent at 4:32 p.m. London time after increasing to 3.05 percent on Sept. 11, the highest since July 27, 2011. The 2.25 percent bond due September 2023 fell 0.51, or 5.10 pounds per 1,000-pound ($1,590) face amount, to 94.05.
Bank of England officials provided an assessment of forward guidance last month and said they won’t raise borrowing costs until unemployment falls to 7 percent. While they don’t see that happening until late 2016, signs of strength in the economy have prompted investors to bet on an earlier increase.
The extra yield investors demand to hold 10-year gilts instead of similar-maturity Treasuries increased seven basis points to nine basis points.
Fed policy makers meeting today and tomorrow will lower the monthly pace of bond purchases by $10 billion, to $75 billion, according to the median response of 34 economists in a Bloomberg News survey on Sept. 6.
Gilts lost 4.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 2.3 percent and Treasuries declined 3.6 percent.
The pound rose 0.1 percent to $1.5899 after climbing as much as 0.3 percent. The U.K. currency weakened 0.1 percent to 83.96 pence per euro.
Consumer prices increased 2.7 percent from a year earlier, compared with 2.8 percent in July, the Office for National Statistics said in London. Producer prices gained 1.6 percent from last year, after climbing 2.1 percent the previous month, a separate report showed.
“The data was in line with economist expectations, but the market has become accustomed to U.K. data outperforming,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London
The U.K. 10-year break-even rate, a gauge of market inflation expectations derived from the difference in yield between gilts and index-linked securities, widened five basis points to 3.08 percentage points after shrinking to 3.03 percentage points yesterday, the narrowest since Aug. 27.
The pound rose earlier following the U.K. government’s sale of a 3.2 billion-pound stake in Lloyds Banking Group Plc (LLOY), a first step toward full private ownership of Britain’s largest mortgage lender.
“There’s a lot of optimism surrounding the U.K. recovery right now and that’s the main driver for sterling,” said Jane Foley, a London-based senior currency strategist at Rabobank International. “We haven’t been given much information on whether the Lloyd’s sale has gone overseas or not, but in a way that’s another bit of news that’s supporting a trend that’s already there.”
The pound has risen 6.6 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.7 percent and the euro advanced 3.1 percent.