U.K. government bonds fell, with 10-year yields touching a two-month high, after Federal Reserve minutes showed officials may reduce debt purchases and data pointed to accelerating British growth.
Gilts underperformed other European sovereigns, with the extra yield that investors demand to hold U.K. 10-year bonds instead of similar-maturity German bunds expanding to the most since October 2005. The pound strengthened versus all of its 16 major counterparts, reaching three-year highs against the Australian and Canadian dollars, after an industry report showed a measure of new orders at British factories rose to the highest in almost two decades in November.
“There’s a spillover into the U.K. from what the Fed did,” said Sam Hill, a U.K. rates strategist at Royal Bank of Canada in London. Gilts are “under pressure,” he said.
The benchmark 10-year yield climbed nine basis points, or 0.09 percentage point, to 2.82 percent at 5:28 p.m. London time, after rising to 2.87 percent, the highest since Sept. 24. The 2.25 percent bond due in September 2023 fell 0.705, or 7.05 pounds per 1,000-pound ($1,617) face amount, to 95.17.
U.S. policy makers “generally expected” improvement in employment data that would “warrant trimming the pace of purchases in coming months,” according to minutes of the Fed’s Oct. 29-30 meeting released yesterday. The central bank buys $85 billion of Treasuries and mortgage-backed securities a month. The Fed next meets on Dec. 17-18.
The spread between 10-year gilts and German bunds expanded six basis points to 108 basis points, the widest close since Oct. 25, 2005.
Five-year gilts fell for a third day after the Debt Management Office sold 4.75 billion pounds of debt maturing in July 2019.
The U.K. allotted the securities at an average yield of 1.905 percent, compared with 1.583 percent at an auction of gilts due in July 2018 on Oct. 17.
The five-year gilt yield climbed six basis points to 1.57 percent, extending this month’s increase to 13 basis points.
Gilts handed investors a loss of 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds slid 1.2 percent and Treasuries fell 2.6 percent.
The pound strengthened 0.4 percent to $1.6170 after rising to $1.6178 yesterday, the highest since Oct. 28. The U.K. currency appreciated 0.2 percent to 83.31 pence per euro. Sterling rallied as much as 1.4 percent to 1.7487 Australian dollars, the strongest level since August 2010, and touched 1.6992 Canadian dollars, the highest rate since February 2010.
The Confederation of British Industry’s manufacturing gauge climbed to 11 this month, the highest since March 1995, the business lobby group said in London. That exceeded the median estimate of 1 in a Bloomberg News survey of economists.
“A very encouraging report that confirms the view that activity in the U.K. has not decelerated,” Annalisa Piazza, an analyst at Newedge Group in London, wrote in a note to clients. “A progressive improvement remains the key scenario in the coming months.”
The U.K. government’s budget shortfall excluding temporary support for banks narrowed to 8.1 billion pounds in October, compared with 8.28 billion pounds a year earlier, the Office for National Statistics said.
The minutes of the Bank of England’s November meeting released yesterday showed the Monetary Policy Committee voted 9-0 to keep the benchmark interest rate at 0.5 percent and the asset-purchase target at 375 billion pounds.
The pound strengthened 6.7 percent in the past six months, the best performer among 10 developed-market counterparts tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.1 percent, while the dollar weakened 0.8 percent.