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U.K. Gilt Yields Approach 12-Week High as Construction Expands

June 4 (Bloomberg) -- U.K. government bonds fell, pushing 10-year yields toward a 12-week high, as an unexpected increase in a purchasing managers index of U.K. construction reduced demand for the safety of fixed-income assets.

Thirty-year yields climbed the most in three months as a gauge of Britain’s retail sales also improved in May. The pound weakened against the dollar and euro. The U.K. sold 1.6 billion pounds ($2.45 billion) of inflation-linked gilts before sales of debt due in 2023 and 2032 scheduled for next week. The Bank of England will keep its target for bond purchases, or quantitative easing, unchanged at a two-day meeting starting tomorrow, according to a Bloomberg survey of economists.

“The PMIs have been stronger so far this week and the retail sales number overnight was a bit better so there’s growing evidence that the recovery, whilst still very young, is gaining a bit of momentum,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “It’s certainly cementing the view that QE is on hold and we do have a lot of supply in the pipeline. There are plenty of reasons to justify the backup in yields.”

The 10-year yield rose four basis points, or 0.04 percentage point, to 2.04 percent at 5:10 p.m. London time after climbing to 2.06 percent yesterday, the highest level since March 8. The 1.75 percent bond due in September 2022 fell 0.36, or 3.60 pounds per 1,000-pound face amount, to 97.60.

Thirty-year gilt yields advanced as much as five basis points to 3.40 percent, the highest level since February 25.

Annual Loss

Gilts handed investors a loss of 1.1 percent this year through yesterday, according to the Bloomberg U.K. Sovereign Bond Index. German bonds dropped 0.8 percent and U.S. Treasuries declined 0.9 percent.

A gauge of U.K. construction rose to 50.8 in May from 49.4 the previous month, according to Markit Economics and the Chartered Institute of Purchasing and Supply. Economists surveyed by Bloomberg forecast an increase to 49.8, below the level of 50 that indicates expansion. Retail sales at stores open at least 12 months rose 1.8 percent from a year earlier, the British Retail Consortium and KPMG said.

“The numbers out this morning have been stronger rather than weaker so that’s contributing” to the higher yields, said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “If rates move up a bit further, people will probably see some value there and come back.”

U.K. Manufacturing

The 10-year yield will fluctuate in a range of 1.75-2.75 percent for the rest of the year, Afseth predicts.

The pound fell 0.2 percent to $1.5292 after climbing to $1.5376 yesterday, the strongest level since May 13. The U.K. currency slid 0.2 percent to 85.47 pence per euro.

Sterling has declined 2.3 percent this year, the worst performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 4.6 percent and the euro rose 3.5 percent.

Markit said yesterday its index of U.K. manufacturing climbed to a 14-month high in May, adding to signs the economy is improving. The Bank of England will leave its bond-purchase target at 375 billion pounds this week, according to all except one of 43 economists surveyed by Bloomberg News.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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