U.K. 10-year government bond yields rose to the highest since 2010 relative to their French counterparts amid diverging outlooks for monetary policy in Britain and the euro area.
The extra yield investors demand to hold benchmark 10-year gilts instead of German bunds was near the widest since 1997 as minutes of the Bank of England’s April meeting showed officials provided an upbeat assessment of the economy. European Central Bank President Mario Draghi said this month policy makers were “unanimous” in their willingness to use unconventional measures to fend off the risk of falling consumer prices. The pound fell from a seven-week high versus the euro.
“The U.K. data backdrop has been improving,” said Simon Peck, a U.K. rates strategist at Royal Bank of Scotland Group Plc in London. “In Europe, you have discussions of quantitative easing and a dovish ECB going forward, in stark contrast to the U.K. Short gilts versus bunds has been one of our key trades,” he said, referring to a bet an asset will decline.
The benchmark 10-year gilt yield fell three basis points, or 0.03 percentage point, to 2.69 percent at 3:40 p.m. London time after climbing to 2.72 percent yesterday, the highest since April 4. The 2.25 percent bond due in September 2023 rose 0.215, or 2.15 pounds per 1,000-pound ($1,679) face amount, to 96.42.
The spread between 10-year gilts and similar-maturity French bonds expanded to as much as 71 basis points today, the most since at least November 2012 based on intraday data, and set for the widest close since February 2010.
Gilts yielded 115 basis points more than German 10-year bunds after the spread closed at 118 basis points yesterday, the most since September 1998.
“The domestic economy was building momentum with some signs of modest rebalancing toward investment,” according to the minutes of the Monetary Policy Committee’s April 9 meeting. Recent surveys point to growth of close to 1 percent in both the first and second quarters of the year, policy makers said.
Central bank officials voted unanimously to keep the key interest rate at 0.5 percent and to maintain the asset purchase target at 375 billion pounds, the minutes showed. At the time of the meeting, unemployment remained above the 7 percent threshold set by the BOE as part of its forward guidance.
U.K. Chancellor of the Exchequer George Osborne achieved his deficit-reduction forecast in the latest fiscal year after stronger-than-expected economic growth boosted tax receipts, data today showed.
Net U.K. borrowing was 107.7 billion pounds in the 12 months through March, or 6.6 percent of gross domestic product, down from 115.1 billion pounds a year earlier, the Office for National Statistics said.
The pound dropped for the first time in three days versus the euro even as a separate report showed U.K. manufacturing confidence climbed to the highest level in more than four decades in April.
A quarterly index of manufacturers’ sentiment rose to 33 in April from 21 in January, the Confederation of British Industry said. That’s the strongest reading since April 1973. A gauge of export sentiment jumped to 27 from 8, the highest in two years, the CBI said.
U.K. inflation expectations for the year ahead were 2 percent this month, the lowest since late 2009, Citigroup Inc. said, citing a YouGov Plc survey. That compares to a reading of 2.1 percent in March.
“These results are likely to further reassure the MPC that the strong economic recovery, falling jobless rate and ultra-low interest rates have not destabilized inflation expectations,” Citigroup economist Michael Saunders wrote in a client note.
The pound weakened 0.4 percent to 82.41 pence per euro after appreciating to 81.98 pence yesterday, the strongest level since Feb. 28. Sterling dropped 0.2 percent to $1.6786.
The pound has strengthened 5.4 percent in the past six months, the best performer of 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 1.5 percent and the dollar gained 1 percent.
The U.K. will sell 4 billion pounds of five-year gilts tomorrow. It last sold the securities on March 4 at an average yield of 1.893 percent, versus 1.911 percent in February.
Gilts returned 2.8 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities also earned 2.8 percent and U.S. Treasuries gained 2 percent.