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Gilt Yields Climb to One-Month High as Industrial Output Rises

U.K. 10-year bond yields reached the highest level in a month after a government report showed Britain’s industrial production increased in June, damping demand for safer assets.

Five-year gilts fell for a sixth day as the Debt Management Office sold 4.5 billion pounds ($6.91 billion) of the securities. Today’s data came after manufacturing and services reports last week that added to evidence the economic recovery is gathering pace. The extra yield on 10-year bonds instead of two-year gilts approached the highest since August 2011. The pound was little changed against the dollar.

“The U.K. recovery is becoming more earnest,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “The long end of the curve, 10-year and above, is going to struggle because the global economic environment is slowly, but steadily, improving.”

The benchmark 10-year gilt yield was at 2.47 percent at 1:01 p.m. in London after climbing to 2.51 percent, the highest since July 5. The price of the 1.75 percent bond maturing in September 2022 was 94.155.

The extra yield on 10-year gilts over two-year securities widened less than one basis point, or 0.01 percentage point, to 209 basis points after expanding to 211 basis points on Aug. 2, the widest since Aug. 9, 2011.

U.K. industrial output increased 1.1 percent from May after stagnating for three months, the Office for National Statistics said in London. Economists surveyed by Bloomberg forecast growth of 0.7 percent.

Gilt Auction

The five-year yield rose two basis points to 1.40 percent after jumping seven basis points yesterday.

The Debt Management Office sold 1.25 percent securities maturing July 2018 at an average yield of 1.41 percent, compared with 1.422 percent when they were last auctioned on June 20 and a record low of 0.787 percent in November.

Gilts lost investors 3.5 percent this year through yesterday, according to Bloomberg World Bond Indexes, as signs global growth is recovering sapped demand for the safer investments. Treasuries dropped 2.8 percent and German bonds declined 1.4 percent.

The pound dropped 0.1 percent to $1.5345 after gaining 1.6 percent during the previous two days. Sterling dropped 0.2 percent to 86.51 pence per euro.

‘Bearish’ Positioning

Bank of England Governor Mark Carney will detail plans for forward guidance on interest rates in the central bank’s quarterly Inflation Report due to be released tomorrow.

“Going into the inflation report, we favor being positioned bearish on the pound,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Not only are they likely to implement forward guidance, they are also likely to implement thresholds or give a positive spin on their assessment of thresholds in such a way to suggest that they could be introducing” them in the future, he said.

Carney introduced guidance in April 2009 while governor of the Bank of Canada -- pledging to keep Canada’s key rate at a record low until mid-2010.

The pound has weakened 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro rose 5.7 percent and the dollar gained 5 percent.

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