U.K. government bonds fell, with 10-year gilts halting a five-day rally, as Cyprus’s banks reopened with little sign of any capital flight after a European Union bailout forced losses on depositors.
The pound slipped against the euro, extending the biggest quarterly drop in more than two years, as Cypriot lenders opened at midday local time with rules curbing access to cash in place that prevented an initial panic to withdraw deposits, reducing demand for the safest assets. Gilts pared their quarterly advance as a U.K. government report showed service industries expanded at the fastest pace in five months.
“There’s a bit of relief and by extension that knocks on to all the so-called safe havens” including gilts, Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London, said of Cyprus. “People were assuming the worst was going to happen and it’s not materializing quite in that dramatic way.”
The 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 1.76 percent at 4:50 p.m. London time. The 1.75 percent bond due in September 2022 dropped 0.37, or 3.70 pounds per 1,000-pound ($1,517) face amount, to 99.88. The gilt yield has fallen seven basis points since Dec. 31.
Services, which account for about three quarters of Britain’s economy, rose 0.3 percent from December, when they dropped 0.4 percent, the Office for National Statistics said in London today. That’s the biggest increase since August.
Longer-maturity gilts stayed lower as the Debt Management Office said it will probably sell a long-dated bond through banks in the second half of June. The DMO will “look to issue in the 50-60-year maturity area, but will seek further market feedback on maturity and announce further details about this offer nearer the time,” it said today in a statement.
Thirty-year gilt yields rose four basis points to 3.11 percent, cutting this week’s drop to six basis points.
The pound weakened 0.1 percent to 84.55 pence per euro today after appreciating to 84.16 pence, the strongest level since Jan. 24. The U.K. currency gained 0.2 percent to $1.5167 today.
Cyprus’s banks were shut from March 16 as the European Union presented a proposal to force losses on all depositors in exchange for a 10 billion-euro ($12.8 billion) bailout. After protests and political upheaval, the plan was rejected by the country’s parliament. A subsequent agreement imposed larger losses on uninsured depositors.
Concern that Cyprus’s banking crisis would spread turmoil across the 17 nations that share the euro boosted demand for U.K. assets as a refuge this month, with 10-year yields falling to the least since Nov. 13 earlier today. Gilts were also supported after Chancellor of the Exchequer George Osborne’s budget on March 20 maintained the central bank’s 2 percent inflation target, easing concern he would permit faster price increases that would dent payments from fixed-income assets.
Sterling has dropped 4 percent against the euro since the start of the year, posting its biggest quarterly decline since the period through September 2010. It has fallen 6.7 percent versus the dollar in the period, the most since the last three months of 2008, when it slumped 18 percent.
In the past month, sterling gained 0.4 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro weakened 1.7 percent and the dollar climbed 0.3 percent.
“The U.K. is a safe haven for many,” said Shant Movsesian, a foreign-exchange strategist at 4Cast Ltd. in London. “The bad news is already out there in the U.K. Clearly the cracks that are there in Europe are still to be seen.”
Gilts returned 1 percent this quarter through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.5 percent, while U.S. Treasuries were little changed.