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Gilts Rise as 3% Yields Lure Buyers; Pound Gains Versus Dollar

Dec. 30 (Bloomberg) -- U.K. government bonds advanced for the first time in four days as 10-year yields near the highest level since July 2011 spurred year-end demand from investors.

Benchmark gilts pared their worst year since 1994 before Bank of England policy makers meet next week after pledging this month to keep borrowing costs low until unemployment, currently as 7.4 percent, falls below 7 percent. The pound rose a third day against the dollar after an industry report showed a gauge of U.K. house prices climbed for an 11th month in December, adding to signs the recovery is gaining momentum.

“While we expect a bearish year for gilts next year, yields have reached levels that some investors may have seen as attractive,” said Richard Kelly, senior strategist at Toronto-Dominion Bank in London. “The market is being driven more by year-end flows rather than fundamentals alone.”

The 10-year gilt yield fell five basis points, or 0.05 percentage point, to 3.03 percent at 4:24 p.m. London time after climbing 13 basis points in the previous three days. The 2.25 percent bond due in September 2023 rose 0.365, or 3.65 pounds per 1,000-pound ($1,653) face amount, to 93.505.

The 10-year yield has increased from 1.83 percent at the end of last year amid speculation the central bank will have to start increasing interest rates sooner than it previously envisaged as the pace of economic recovery quickens. The benchmark gilt yield climbed to 3.08 percent on Dec. 27, the highest since July 2011.

Wider Spread

The extra yield on 10-year gilts instead of two-year securities expanded two basis points to 2.46 percentage points after increasing to 248 basis points on Dec. 6, the widest since Sept. 19. The spread has expanded as investors sought higher returns on longer-maturity debt to compensate for any acceleration in inflation as growth picks up.

The yield on two-year gilts dropped six basis points today to 0.56 percent.

Gilt trading volumes declined as the new-year holiday loomed. About 42,000 contracts of gilt futures expiring in March 2014 changed hands compared with this year’s daily average of around 151,000.

U.K. gilts lost 4.8 percent this year through Dec. 27, according to Bloomberg World Bond Indexes. German securities fell 2.3 percent and U.S. Treasuries declined 3.3 percent.

Pound Advances

The pound rose 0.3 percent to $1.6524 after climbing to $1.6578 on Dec. 27, the highest level since August 2011. It has appreciated 1.7 percent this year. The U.K. currency weakened 0.2 percent to 83.59 pence per euro after advancing to 83.29 pence, the strongest level since Dec. 5.

“We expect the pound to retain its strength, especially against the dollar, into 2014,” said Eimear Daly, head of market analysis at Monex Europe Ltd. in London. “The pace of the recovery and market speculation about the Bank of England’s interest-rate outlook will continue to underpin the currency.”

Home values across England and Wales increased 0.5 percent from November, property researcher Hometrack Ltd. said. In 2013, prices jumped 4.4 percent, rebounding from a 0.3 percent decline the previous year.

The pound has gained 5.2 percent this year, the third best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 8.7 percent and the dollar advanced 3.2 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net

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