U.K. Gilts Decline as U.S. Lawmakers See Progress on Budget Deal

U.K. government bonds fell, pushing 10-year yields to the highest in three weeks, as U.S. policy makers said they were close to a deal to bring a halt to the nation’s fiscal standoff, damping demand for the safest assets.

Benchmark gilts dropped for a second day after government reports showed inflation was faster in September than economists forecast and a gauge of home prices increased in August. The pound strengthened the most in three weeks versus the euro before U.K. unemployment figures are released tomorrow. Bank of England Governor Mark Carney has said policy makers won’t consider raising their key interest rate from a record-low until unemployment falls to 7 percent.

“We’re down in gilts, bunds and Treasuries because there is some optimism” of a budget deal in the U.S., said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “To a certain extent U.K. inflation was above expectations and it puts a little bit of pressure on gilts. The underperformance is modest.”

The 10-year gilt yield rose five basis points, or 0.05 percentage point, to 2.80 percent at 4:39 p.m. London time after touching 2.81 percent, the highest level since Sept. 24. The 2.25 percent bond maturing in September 2023 fell 0.44, or 4.40 pounds per 1,000-pound ($1,597) face amount, to 95.285.

Benchmark German 10-year bund yields increased five basis points to 1.91 percent. Their U.S. equivalents climbed three basis point to 2.72 percent.

Senate leaders are poised to reach an agreement as early as today to bring a halt to the fiscal standoff, and now must race the clock to sell the plan to lawmakers before U.S. borrowing authority runs out on Thursday.

Deadline Change

The emerging deal would stave off a potential default, end the 15-day-old government shutdown and change the immediate deadlines in favor of three new ones over the next four months. It’s far from complete as the Senate may delay passing the plan and House Republicans may seek to block or change it.

U.K. government bonds lost 3.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 2.6 percent and German securities dropped 2 percent.

Consumer prices in the U.K. rose 2.7 percent in September from a year earlier, matching the rate in August, the Office for National Statistics said. Economists surveyed by Bloomberg News forecast it would slow to 2.6 percent. Home prices climbed an annual 3.8 percent in August after increasing 3.3 percent the previous month, the Office said.

The pound strengthened 0.4 percent to 84.49 pence per euro, the biggest daily gain since Sept. 23. The U.K. currency was little changed at $1.5968 after sliding to $1.5914 on Oct. 10, the lowest since Sept. 18.

Jobless Rate

The unemployment rate measured by International Labour Organization methods stayed at 7.7 percent in the three months through August, according to economists in a Bloomberg survey. Central bank policy makers forecast the jobless rate won’t fall to 7 percent until late 2016.

“Now that we have the core CPI for September, chances may have increased that we see evidence of accelerating earnings growth for August,” strategists at Citigroup Inc. wrote in an e-mailed note. “This combined with another drop in the U.K. claimant count in September and stable ILO unemployment rate for August could fuel speculations that a pickup in earnings could continue to support the U.K. economic recovery and sterling tomorrow.”

The pound appreciated 3.1 percent in the past three months, the best performer after New Zealand’s dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 0.4 percent, while the U.S. dollar slid 3.1 percent.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

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

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.