U.K. government bonds declined for a sixth day after the Confederation of British Industry raised its forecasts for the nation’s economic growth, damping demand for the safety of fixed-income securities.
Benchmark 10-year yields climbed to the highest level in two years as the data followed reports this month that showed services, manufacturing and construction activity increased in July. The extra yield investors demand to hold 10-year gilts instead of two-year securities increased to the widest since July 2011. The pound advanced to the strongest in two months against the dollar.
“Yields are probably at the right sort of levels now based on the data we’ve seen,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “Things are clearly getting better but possibly not at the rate the recent improvement in the data suggests therefore, we don’t think we’re on a march for much higher yields.”
The 10-year gilt yield rose four basis points, or 0.04 percentage point, to 2.75 percent at 4:48 p.m. London time, the highest since Aug. 8, 2011. The 1.75 percent bond due in September 2022 fell 0.33, or 3.30 pounds per 1,000-pound ($1,567) face amount, to 92.055.
The CBI’s quarterly forecasts see the economy expanding 1.2 percent this year and 2.3 percent in 2014, up from 1 percent and 2 percent projected in May. The London-based business lobby also said unemployment -- which the Bank of England has set as the key indicator for its guidance on policy -- will fall to 7.6 percent next year after staying at its current 7.8 percent at the end of 2013.
The yield spread of 10-year gilts over two-year securities increased for a fifth day, expanding as much as three basis points to 231 basis points. The difference has averaged 166 basis points during the past 12 months.
Gilts lost investors 4.7 percent this year through Aug. 16, according to Bloomberg World Bond Indexes. German securities dropped 2.3 percent and Treasuries declined 3.6 percent.
Inflation-linked gilts have fallen 0.8 percent in 2013, a Bank of America Merrill Lynch index shows. The U.K. is scheduled to auction 1.75 billion pounds of index-linked securities due in November 2019 tomorrow.
The pound appreciated 0.2 percent to $1.5666 after advancing to $1.5673, the strongest level since June 19. The U.K. currency was little changed at 85.20 pence per euro.
Investors should sell the pound against the dollar, betting the U.K. economic recovery isn’t sustainable, according to Morgan Stanley strategists led by Hans Redeker in London.
British home values dropped 1.8 percent in August, the first decline this year, property-website operator Rightmove Plc said in a report today. Prices are still up 5.5 percent in the past year.
“The broadening of the U.S. dollar recovery is also now likely to be felt against sterling,” the Morgan Stanley strategists wrote in an e-mailed note. “The latest Rightmove house price survey has also showed the first monthly decline for this year. Hence, we have used the rebound at the end of last week to establish a short position at $1.5640.” A short position is a bet an asset will decline.
The pound has strengthened 5 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.9 percent and the dollar climbed 3.2 percent.