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Gilts Decline as U.K. Data Diminish Safety Demand; Pound Weakens

U.K. government bonds fell for a second week as industry reports showed manufacturing and construction expanded more than analysts forecast, sapping demand for fixed-income securities.

Benchmark 10-year gilt yields climbed to a three-week high after the Bank of England left its bond-buying program on hold and kept interest rates at a record low. Governor Mark Carney will detail the central bank’s policy on forward guidance on interest rates in next week’s Inflation Report in an attempt to anchor borrowing costs. Britain’s economy will grow faster this year than previously forecast, the National Institute of Economic and Social Research said. The pound fell this week against the dollar and the euro.

“The stronger U.K. data has impacted 10-year yields,” Sam Hill, a U.K. rates strategist at Royal Bank of Canada in London, said yesterday. “Beyond the five-year sector there is more of a risk that yields do respond to better data. The message from U.K. policy makers should be strong enough to trump better data out to the five-year sector.”

The yield on 10-year gilts climbed nine basis points, or 0.9 percentage point, in the week to 2.43 percent at 5 p.m. London time yesterday, the biggest gain since the five days ended June 21. The 1.75 percent security due in September 2022 fell 0.72, or 7.20 pounds per 1,000-pound face amount, to 94.52.

Reports this week showed manufacturing and construction expansion exceeded analyst predictions. The U.K. economy expanded 0.6 percent in the second quarter, a report showed last month, while unemployment claims fell in June at the fastest pace in three years.

Carney Presentation

Carney will present the Monetary Policy Committee’s review of steering policy expectations next week after saying in July that changes in bets on future interest rates were “not warranted.” A report next week will show a gauge of U.K. services expanded for a seventh month in July, according to a Bloomberg survey of economists.

Gilts lost 3.1 percent this year through Aug. 1, according to Bloomberg World Bond Indexes. German bunds fell 1.3 percent and Treasuries slid 3.1 percent.

The pound fell 0.7 percent in the week to $1.5273. The U.K. currency depreciated 0.7 percent to 86.90 pence per euro after depreciating to 87.70 pence on Aug. 1, the weakest level since March 12.

Sterling rose 0.9 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro added 4.7 percent and the dollar climbed 2.8 percent.

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