U.K. Yields at Highest Versus Germany’s Since ’05 on Growth Bets

U.K. 10-year bond yields were at the highest level relative to Germany’s since 2005 amid signs investors are betting British growth will outpace that of Europe’s biggest economy.

U.K. government bonds declined today, pushing two-year gilt yields to the highest level since July 2011, as a report showed U.S. employers added more jobs last month than analysts forecast. Britain’s gross domestic product will increase 2.7 percent this year, compared with German growth of 1.7 percent, according to the median forecast of analysts in Bloomberg News surveys. The pound was little changed.

“The spread is historically stretched but we would argue there’s good reason for that,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “If you look at the relative outlook for economic performance, we think the U.K. recovery is on fairly solid ground. It’s a very different story for Germany.”

The 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 2.79 percent at 5 p.m. London time. The 2.25 percent bond due in September 2023 fell 0.22, or 2.20 pounds per 1,000-pound ($1,672) face amount, to 95.49. The two-year rate rose as much as seven basis points to 0.70 percent.

Germany’s 10-year bund yield was little changed at 1.65 percent, leaving the extra yield investors demand to hold the U.K. securities at 114 basis points. That’s the highest close since September 2005, according to data compiled by Bloomberg, based on closing prices.

Wider Spread

Bank of America expects the spread will widen to 125 basis points by the end of this year, Wraith said. Industry reports this week showed the U.K.’s services and manufacturing industries expanded more in February than economists forecast, and mortgage approvals for home purchases jumped in January to the most since November 2007.

The Bank of England yesterday kept interest rates at a record low and held its bond-purchase stimulus program at 375 billion pounds.

The Bank of England’s decision to maintain the Official Bank Rate (UKBRBASE) at 0.5 percent, where it’s been since March 2009, was expected by all 52 economists in a separate Bloomberg survey. Analysts also forecast no change in the central bank’s asset-purchase target.

The Bank of England said expectations for an interest-rate increase in the coming 12 months climbed to the highest in almost two years, as the economy strengthened.

Rate Increases

Forty percent of respondents to the central bank’s quarterly Inflation Attitudes Survey, carried out last month, predict the benchmark rate to rise in the period. That’s up from 34 percent in November and is the highest reading since May 2012. Thirty-seven percent anticipate the rate will stay the same, the survey showed.

U.S. employers added 175,000 jobs in February, following a revised 129,000 increase the prior month that was bigger than initially estimated, Labor Department figures showed in Washington. The median forecast of economists in a Bloomberg survey called for a 149,000 advance last month. The unemployment rate rose to 6.7 percent from 6.6 percent.

The pound traded at $1.6722 after climbing to $1.6823 on Feb. 17, the highest since November 2009. The U.K. currency was at 82.93 pence per euro, after depreciating to 83.01 pence, the weakest level since Nov. 2.

The European Central Bank yesterday kept its main refinancing rate at a record-low 0.25 percent. ECB staff raised the growth forecast for gross domestic product in the currency bloc to 1.2 percent in 2014 from 1.1 percent predicted in December. The Bank of England expects the U.K. economy to expand 3.4 percent this year.

Sterling has appreciated 13 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 6.6 percent, while the dollar gained 0.2 percent.

Gilts handed investors a loss of 1.4 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. U.S Treasuries dropped 1.3 percent, while German securities returned 0.6 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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