U.K. government bonds halted a three-day gain as the rally, which pushed 10-year yields to the lowest level since August, rendered them unattractive to investors.
The pound was set for a second weekly decline against the dollar after Bank of England Governor Mark Carney said the central bank would not increase interest rates this year. German bunds and U.S. Treasuries also ended three days of gains. The yield difference between 10-year gilts and similar-maturity bunds narrowed from the widest since 1998 this week.
“The U.K. has reversed quite a bit of its underperformance this week, so there’s some profit taking coming in,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “You’re really pushing on a pretty short piece of string,” he said referring to the potential for future gains in fixed-income assets.
The 10-year yield rose one basis point, or 0.01 percentage point, to 2.54 percent at 12:30 p.m. London time, having fallen 15 basis points this week. It reached 2.52 percent yesterday, the lowest since Aug. 13. The 2.25 percent gilt due in September 2023 fell 0.11, or 1.10 pounds per 1,000-pound ($1,681) face amount, to 97.625.
The rate on 10-year German bunds was little changed at 1.32 percent, leaving the yield spread between the securities and equivalent-maturity U.K. gilts at 122 basis points, down from a more than 15-year high of 127 basis points on May 12. Yields on similar-maturity U.S. debt added one basis point to 2.50 percent.
Carney said this week the Bank of England is prepared to wait until next year to increase borrowing costs. Its benchmark has been at a record-low 0.5 percent since March 2009. Policy makers said in their quarterly Inflation Report that while the level of spare capacity in the economy had “narrowed slightly” in the past three months, there “remains scope to make greater inroads into slack before raising” rates.
Central bank officials also said they’ll start the process of tightening policy with rate increases, rather than selling some of the 375 billion pounds of gilts bought under a program of quantitative easing to stimulate the economy.
The pound was little changed at $1.6806, having fallen 0.3 percent since May 9. Sterling strengthened 0.1 percent to 81.55 pence per euro, set for a 0.1 percent gain this week.
The U.K. currency has risen 8.7 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the strengthening economy boosted bets the BOE will hasten plans to increase borrowing costs. The euro added 4.6 percent, while the dollar fell 2.3 percent.
Gilts returned 4.2 percent this year through yesterday, Bloomberg World Bond Indexes show. German bonds also gained 4.2 percent and Treasuries earned 3.3 percent.