U.K. government bonds fell for a second day, pushing 10-year yields to the highest level in 15 months, as speculation the Federal Reserve will reduce debt purchases reduced demand for fixed-income securities.
Ten-year gilt yields headed for their biggest weekly increase since January 2009, while the spread over similar-maturity bunds expanded for a fifth day. Sovereign bonds across the world have tumbled since Fed Chairman Ben S. Bernanke said June 19 that policy makers may begin paring asset purchases this year and end them in mid-2014. The pound weakened against the dollar and the euro.
“The market is getting quite concerned about the end of quantitative easing,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Everything comes down to what goes on in the Treasury market and the hawkish surprise we got this week has obviously affected that. One of the most interesting things in the past few weeks has been the propensity of gilts to underperform bunds in a selloff.”
The benchmark 10-year gilt yield rose 12 basis points, or 0.12 percentage point, to 2.42 percent at 4:34 p.m. in London, the highest since March 21, 2012. The 1.75 percent bond due September 2022 fell 0.965, or 9.65 pounds per 1,000-pound ($1,538) face amount, to 94.54.
The yield has climbed 36 basis points this week, the most since the period ended Jan. 23, 2009.
The Fed will trim its monthly bond purchases to $65 billion in September and end buying in June 2014, according to the plurality of estimates by economists in a Bloomberg survey conducted June 19-20.
The 10-year Treasury yield has increased 37 basis points this week, while the rate on similar-maturity German bunds has climbed 22 basis points.
The extra yield investors demand to hold 10-year gilts instead of bunds widened five basis points to 68 basis points.
Gilts have handed investors a loss of 2.9 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.6 percent and Treasuries declined 2.2 percent, the indexes show.
Britain’s budget deficit narrowed in May as government spending declined and the Treasury got a 3.2 billion-pound boost from a tax cooperation deal with Switzerland. Net borrowing excluding temporary support for banks was 12.7 billion pounds compared with 15.6 billion pounds a year earlier, the Office for National Statistics said.
The Debt Management Office is scheduled to sell a 3.5 percent gilt maturing in 2068 via banks next week.
The pound fell 0.8 percent to $1.5379 after declining to $1.5369, the lowest level since June 5. It has slumped 2.1 percent this week. The U.K. currency depreciated 0.1 percent to 85.31 pence per euro.
Sterling has declined 0.6 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 5.2 percent, the best performer, and the dollar rose 5.8 percent.