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Gilts Post Biggest Drop in Three Years Amid Global Growth Signs

U.K gilts declined, with 10-year yields posting the biggest weekly increase in more than three years, as investors raised their inflation expectations amid signs the global economic recovery is gathering momentum.

Ten-year yields climbed to the highest since October. The Federal Reserve raised its outlook for the U.S. economy this week and speculation mounted the euro-area sovereign debt crisis is easing, prompting traders to reduce bets on more asset purchases, or quantitative easing, by the Bank of England and the Fed. Fitch Ratings said that the U.K. risks losing its AAA status. The pound rose against all 16 of its major peers.

“There’s fading hopes that the Fed is going to do another round of QE, which triggered the initial sell-off in the U.S., and German and U.K. bonds are catching up,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks. “The Fitch announcement came as a bit of a surprise and added to the negative sentiment” for gilts, he said.

The 10-year gilt yield rose 29 basis points in the week, or 0.29 percentage point, to 2.45 percent as of 4:17 p.m. London time yesterday. That was the biggest weekly gain since advancing by 39 basis points in the five days through Jan. 23, 2009. The yield reached 2.49 percent, the highest since Oct. 31. The 4 percent bond due March 2022 fell 2.83, or 28.30 pounds per 1,000-pound ($1,583) face amount, to 113.68.

Sterling Strengthens

The 30-year yield jumped 26 basis points to 3.48 percent, after breaching 3.50 percent for the first time since October. Yields on the benchmark German bund climbed 26 basis points this week to 2.05 percent, while the Treasury 10-year rate was 28 basis points higher at 2.31 percent.

The pound snapped two weeks of losses against the dollar, rising 1 percent to $1.5827, and strengthened 0.6 percent to 83.21 pence per euro.

Gilts may extend their slide next week amid speculation that a government report will show inflation stayed above the central bank’s 2 percent target last month.

Consumer prices rose 3.3 percent from a year earlier after a 3.6 percent gain in January, the Office for National Statistics will say on March 20, according to the median prediction of 36 economists surveyed by Bloomberg. The Bank of England is scheduled to release the minutes of its latest policy meeting a day later.

The cost of living in the U.S. rose in February by the most in 10 months, the Labor Department said in Washington yesterday. The consumer-price index climbed 0.4 percent, after increasing 0.2 percent the prior month. Quicker inflation erodes the purchasing power of the fixed payments from bonds.

Breakeven Rate

The U.K. 10-year break-even rate, a measure of expectations of inflation derived from a difference in yield between regular and index-linked bonds, widened 12 basis points this week to 2.79 percentage points. It reached 2.81 percentage points on March 15, the most since Oct. 11.

The extra yield that investors get for holding 30-year gilts instead of the two-year securities widened to more than 300 basis points yesterday for the first time since Sept. 29, based on closing levels.

U.K. bonds handed investors a loss of 2.8 percent this year through March 15, after returning 17 percent in 2011, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries lost 1.7 percent in 2012, with German debt falling 0.8 percent, the indexes show.

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