U.K. government bonds snapped a two-day gain after a report showed house prices had their biggest annual increase in 3 1/2 years, adding to speculation the Bank of England will hasten plans to lift interest rates.
Gilts underperformed German bunds as Barclays Plc suggested investors sell 10-year gilts because their yields don’t reflect strength in first-quarter U.K. economic data. House prices in England and Wales rose 7.2 percent in March from a year earlier, the fastest annual gain since September 2010, real-estate researcher Acadata and LSL Property Services Plc said today. The pound is set for its biggest weekly advance in two months against the dollar.
“Gilt yields are too low relative to improved economic fundamentals in the U.K.,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “They suggested the market is underestimating the risk that the Bank of England may raise interest rates sooner than it thinks.”
The 10-year gilt yield rose one basis point, or 0.01 percentage point, to 2.63 percent at 11:30 a.m. London time after dropping seven basis points in the past two days. The 2.25 percent bond due September 2023 fell 0.1, or 1 pound per 1,000-pound ($1,677) face amount, to 96.84.
The yield spread between the gilts and similar-maturity German bunds widened one basis point to 110 basis points.
The Bank of England left its official bank rate at 0.5 percent yesterday and maintained its asset-purchase program at 375 billion pounds. The Monetary Policy Committee has said it won’t consider raising borrowing costs at least until unemployment, currently at 7.2 percent, falls to 7 percent.
Investors should enter a short position, or a bet an asset’s price will fall, on U.K. 10-year gilts, Barclays said.
“The move toward policy normalization continues with the Bank of England expected to be the first of the major central banks to begin rate normalization” in the second quarter of 2015, Barclays analyst Moyeen Islam wrote in an e-mailed note. U.K. data in the first quarter “have been uniformly strong but, despite this, 10-year rates are at their lows of the year.”
Gilts returned 3.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds earned 2.8 percent and Treasuries rose 2.3 percent.
The pound was little changed at $1.6762, bound for a 1.1 percent advance this week, the most since the period ended Feb. 14. It declined 0.2 percent to 82.92 pence per euro, poised for a second week of declines.
Sterling has risen 10 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes as improved economic data spurred bets the central bank will increase interest rates sooner than it forecast. The euro gained 7 percent and the dollar climbed 0.1 percent.
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