Gilts Rise Second Day on Fed Bets; Pound Climbs to Two-Week High

U.K. gilts rose with Treasuries, gaining for a second day, on speculation the partial U.S. government shutdown slowed economic growth and will prompt the Federal Reserve to maintain its asset-buying stimulus program.

Benchmark 10-year gilt yields declined to the lowest in more than a week after President Barack Obama yesterday signed a measure that reopened federal services and extended the nation’s borrowing authority until next year, averting a default. German bunds also advanced today. The pound strengthened to the highest in two weeks versus the dollar amid signs the U.K. economic recovery is gathering momentum.

“The rally in gilts is correlated to the U.S. and expectations of more bullish moves from here with tapering perhaps being pushed back,” said Simon Peck, a U.K. rates strategist at Royal Bank of Scotland Group Plc in London. “Domestic drivers have been relatively encouraging. Gilt underperformance is going to continue in the medium term but it could be a bouncy ride in the interim.”

The 10-year yield fell three basis points, or 0.03 percentage point, to 2.71 percent at 4:47 p.m. London time after reaching 2.68 percent, the lowest level since Oct. 9. The 2.25 percent bond maturing in September 2023 rose 0.285, or 2.85 pounds per 1,000-pound ($1,619) face amount, to 96.015.

Data yesterday showed U.K. retail sales rose more than analysts forecast last month, following an Oct. 16 report that showed jobless claims fell in September by the most in 16 years.

The Citigroup U.K. economic surprise index was at 40.2 after rising to 40.9 yesterday, the most since Oct. 8. The gauge, which shows whether data beat or fell short of economists’ forecasts, dropped to 20.9 on Oct 14, the lowest level since June 19.

Pound Gains

U.K. government bonds lost 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries dropped 2.2 percent and German securities declined 2 percent.

The pound rose 0.1 percent to $1.6187 after touching $1.6225, the highest since Oct. 3. It climbed 1.3 percent yesterday, the biggest gain since Sept. 18, and has risen 1.4 percent versus the U.S. currency this week, the most since the period ended Sept. 13. Sterling was little changed at 84.60 pence per euro, having strengthened 0.4 percent this week.

“A move towards $1.64 could be on the cards for the pound,” said Valentin Marinov, head of Group-of-10 currency strategy at Citigroup Inc. in London. “The primary reason for short-term optimism could be renewed improvement in U.K. data. The jobs and retail sales data is producing a nice uptick in the economic surprise index.”

The pound appreciated 5.1 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 4 percent, while the dollar weakened 1.4 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

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