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Gilts Climb as Pound Falls to Three-Week Low After U.K. GDP Data

U.K. bonds advanced and the pound dropped to a three-week low versus the dollar as data revisions showed gross domestic product shrank more than previously estimated from its peak in 2008 to the depths of the recession.

Ten-year gilt yields slid to the lowest in almost a week as a report showed Britons’ disposable income plunged the most in 25 years in the first quarter, even as the economy grew. U.K. GDP contracted 7.2 percent from its peak, more than the 6.3 percent previously estimated, the Office for National Statistics said in London. Sterling fell yesterday after Bank of England policy maker David Miles said the economy may still need more support and renewed his call for more asset purchases.

“The original recession in 2008-2009 was deeper than we first thought so that shows there’s more of a hurdle to clear,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “We are expecting monetary policy to remain loose, which will underpin gilts.”

Benchmark 10-year gilt yields fell four basis points, or 0.04 percentage point, to 2.42 percent at 4:37 p.m. London time after reaching 2.39 percent, the least since June 21. The 1.75 percent security due September 2022 rose 0.29, or 2.90 pounds per 1,000-pound ($1,523) face amount, to 94.505. The rate dropped eight basis points yesterday, matching the most since March 1.

Thirty-year yields dropped three basis points to 3.57 percent.

Economy Grows

Britain’s economy expanded 0.3 percent in the three months through March after shrinking 0.3 percent in the final three months of 2012, the ONS said. That was unchanged from an initial estimate and was forecast by most economists in a Bloomberg News survey. Real household disposable income fell 1.7 percent from the previous three months, the biggest drop since 1987, the report showed.

BOE Governor Mervyn King said this week that recent data is “too weak to be satisfactory.” King will be replaced as central-bank chief by former Bank of Canada Governor Mark Carney next month.

“The data suggest the economy remains weak and is still failing to achieve the desired rebalancing,” Michael Saunders, an economist at Citigroup Inc wrote in a note to clients. “Pretty much the only thing that looks stronger is the case for extra stimulus.”

U.K. government bonds also advanced as investors awaited further signals on Federal Reserve stimulus. The U.S. economy is set for “a couple more years of sluggish growth” and the central bank is not close to decreasing its balance sheet, Fed Bank of Richmond President Jeffrey Lacker said yesterday.

Bond Returns

Ten-year gilt yields jumped 35 basis points last week, the most since January 2009, after Fed President Ben S. Bernanke signaled policy makers may start reducing their asset-purchase program this year if economic growth is in line with central-bank projections. The 10-year rate is poised for a 65 basis-point gain this quarter, the biggest increase since June 2008.

U.K. gilts handed investors a loss of 3.6 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.9 percent and Treasuries declined 2.8 percent, the indexes show.

The pound fell 0.6 percent to $1.5230 after touching $1.5202, the lowest level since June 3. The U.K. currency weakened 0.6 percent to 85.47 pence per euro.

“Sterling has softened,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Some people were expecting an upward revision and that didn’t happen,” she said, referring to the GDP data. “The outlook for Fed tapering will be key as we progress in to the summer.”

Fed Tapering

The pound will advance to $1.57 in the next three months, Foley predicted, as expectations for Fed tapering fade. The median estimate in a Bloomberg survey is for Britain’s currency to end the third quarter at $1.51.

The pound has strengthened 3.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 5 percent and the dollar climbed 2.9 percent.

The index shows Britain’s currency has advanced 3.2 percent so far this quarter, heading for the biggest increase since September 2011.

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