Gilts fell today after an industry report showed house prices increased for a 15th month in March. Inflation in the 18-nation euro area slowed to the lowest level in more than four years in March, data showed this week, adding pressure on the European Central Bank to cut interest rates. The phrase “Cool Britannia” was used in the late 1990s to depict a period of renewed optimism in the U.K. The pound was little changed.
“There is a big disconnect between gilts and European yields,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “Gilt yields are following Treasuries’ higher as the economic recovery improves. The widening differentials between the U.K. and Germany mean their yield spread is going to get wider.”
The benchmark 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 2.77 percent at 11:39 a.m. London time. The 2.25 percent bond maturing in September 2023 fell 0.265, or 2.65 pounds per 1,000-pound ($1,664) face amount, to 95.75.
Germany’s 10-year yield rose three basis points to 1.60 percent. The extra yield investors demand to hold the U.K. securities increased to 117 basis points today after rising to 118 basis points on March 28, the highest since September 1998, based on closing prices.
The last time the spread between the two yields was this wide, Tony Blair was U.K. Prime Minister after a landslide victory in 1997, Gerhard Schroeder was about to take office as Chancellor of Germany, and the euro was yet to be introduced. Britain’s economy expanded 3.4 percent that year, while Germany’s grew 0.6 percent.
Ten-year gilt yields ended September 1998 at 4.90 percent, while Germany’s were at 3.90 percent.
Gilts returned 2.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities rose 2.5 percent and U.S. Treasuries gained 1.6 percent.
U.K. bonds declined today as Nationwide Building Society said the average price of a home rose 0.4 percent from February to 180,264 pounds, about 3 percent below its 2007 peak. Values in London at the end of the first quarter were 20 percent above their previous record at an average of 362,699 pounds.
Citigroup Inc.’s Economic Surprise Index for the U.K., which measures whether data is exceeding or falling short of market expectations, increased to 31.9 yesterday from 7.7 at the end of last year. A similar gauge for the euro region dropped to minus 4.2 from positive 6.4.
Thirty-year gilts fell as the Debt Management Office sold 2.5 billion pounds of the securities at an average yield of 3.528 percent, compared with 3.527 percent at the previous auction on Feb. 13.
The yield on 30-year securities in the secondary market climbed two basis points to 3.52 percent.
The pound strengthened 0.1 percent to $1.6639 after rising to $1.6823 on Feb. 17, the highest level since November 2009. Sterling appreciated 0.1 percent to 82.90 pence per euro.
Sterling rose 11 percent in the past year, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro strengthened 8.2 percent, while the dollar weakened 0.3 percent.
To contact the reporter on this story: Anchalee Worrachate in London at firstname.lastname@example.org