U.K. government bonds fell for the first time in three days amid speculation the Federal Reserve will begin to reduce asset purchases as soon as this month, removing downward pressure on global borrowing costs.
Five-year yields climbed toward the highest level since September as the Debt Management Office sold 4.5 billion pounds ($7.36 billion) of the securities. German bunds and U.S. Treasuries also declined before the Fed holds its next policy meeting on Dec. 17-18. The pound dropped for a second day versus the dollar after rising to the strongest in more than two years earlier this week.
“For the next week or so we remain cautious on the market overall as the Fed meeting approaches,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “Even though we don’t expect tapering to be announced in the December meeting, the market will be nervous about what the Fed’s statement will say given the recent better employment data.”
The yield on the benchmark 10-year gilt climbed four basis points, or 0.04 percentage point, to 2.91 percent at 4:30 p.m. in London after dropping six basis points during the past two days. The 2.25 percent bond due September 2023 fell 0.345, or 3.45 pounds per 1,000-pound face amount, to 94.48.
The Fed will start reducing bond purchases from $85 billion a month at next week’s meeting, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg, an increase from 17 percent on Nov. 8.
U.S. policy makers are considering reducing purchases “in coming months” if the economy improves as expected, according to the minutes of their October meeting released on Nov. 20.
The Debt Management Office sold gilts maturing in July 2019 at an average yield of 1.994 percent, compared with 1.905 percent at a previous auction on Nov. 21. Investors bid for 2.04 times the amount allotted, versus 1.41 times last month.
The five-year yield climbed three basis points to 1.66 percent after rising to 1.71 percent on Dec. 6, the highest level since Sept. 23.
Gilts handed investors a loss of 3.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities fell 1.6 percent and U.S. Treasuries declined 2.7 percent.
The pound weakened 0.2 percent to $1.6337 after rising to $1.6466 on Dec. 10, the strongest level since August 2011. The U.K. currency was little changed at 84.18 pence per euro.
Chancellor of the Exchequer George Osborne today told the Parliamentary Treasury Committee the Bank of England has done a “better job than some central banks at giving forward guidance” on the likely path of borrowing costs.
The central bank, led by Governor Mark Carney, has pledged to keep its benchmark rate at a record-low 0.5 percent until unemployment, current at 7.6 percent, falls to 7 percent.
“There has been some discussion in the United States about turning off the taps,” Osborne said. “The lesson we can learn from all the discussion in the U.S. about the taper and the impact that has on markets is that good communication is necessary and I think that Governor Carney goes out of his way in his speeches to be clear about what’s guiding his decisions.”
The pound has gained 5.6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.4 percent and the dollar appreciated 0.8 percent.