Gilts Decline as British Optimism Improves, Before Carney Speech

U.K. government bonds declined for the first time in three days as a report showed British business optimism rose to the highest since 2010, damping demand for fixed-income assets.

Benchmark 10-year gilt yields climbed from near the lowest level since August as a separate report showed U.K. inflation expectations rose this month. Bank of England Governor Mark Carney holds a press conference in London today after the central bank kept interest rates at a record-low 0.5 percent this month and held asset purchases at 375 billion pounds ($606 billion). Carney introduced forward guidance on interest rates in August. The pound weakened for a fifth day versus the euro.

“We may have got to the bottom of the range for gilt yields,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “The data has been reasonably firm. I don’t think Carney will change his tune much today.”

Benchmark 10-year gilt yields rose four basis points, or 0.04 percentage point, to 2.63 percent at 4:49 p.m. London time after dropping to 2.59 percent yesterday, the lowest since Aug. 27. The 2.25 percent bond maturing in September 2023 fell 0.295, or 2.95 pounds per 1,000-pound face amount, to 96.7.

The yield difference, or spread, investors demand to hold 10-year gilts instead of their German equivalents widened three basis points to 86 basis points after reaching 82 basis points, the narrowest since Aug. 28.

GDP Report

The Confederation of British Industry said its quarterly gauge of business optimism climbed to 24 in the three months through October from 7 in the same period through July. That’s the highest level since April 2010.

U.K. inflation expectations for the year ahead rose to 3.2 percent this month from 2.5 percent in September, Citigroup Inc. said in an e-mailed statement, citing a YouGov Plc (YOU) survey. The Bank of England has a 2 percent inflation target.

A report tomorrow will show the U.K. economy expanded 0.8 percent in the third quarter compared with 0.7 percent in the previous three months, according to the median of 40 analyst estimates in a Bloomberg News survey.

U.K. gilts lost 2.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 1.8 percent and German securities slid 1.5 percent.

The pound dropped 0.2 percent to 85.37 pence per euro after depreciating to 85.55 pence, the weakest since Aug. 29. Sterling was little changed at $1.6163 after rising to $1.6257 yesterday, the highest since Oct. 1.

Sterling gained 2.8 percent in the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.7 percent, while the dollar fell 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

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