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U.K. Bonds Halt Three-Day Advance Amid Concern Rally Is Overdone

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May 16 (Bloomberg) -- U.K. government bonds halted a three-day gain as the rally, which pushed 10-year yields to the lowest level since August, rendered them unattractive to investors.

The pound rose, paring a second weekly decline against the dollar. Bank of England Governor Mark Carney signaled this week the central bank was prepared to wait until next year to increase interest rates. German bunds and U.S. Treasuries also fell for the first time in four days. The yield difference between 10-year gilts and similar-maturity bunds narrowed from the widest since 1998 this week.

“The U.K. has reversed quite a bit of its underperformance this week, so there’s some profit taking coming in,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “You’re really pushing on a pretty short piece of string,” he said referring to the potential for future gains in fixed-income assets.

The 10-year yield rose three basis points, or 0.03 percentage point, to 2.56 percent at 4:06 p.m. London time, having fallen 13 basis points this week. The rate dropped to 2.52 percent yesterday, the lowest since Aug. 13. The 2.25 percent gilt due in September 2023 fell 0.27, or 2.70 pounds per 1,000-pound ($1,682) face amount, to 97.465.

Bunds, Treasuries

The rate on German 10-year bunds rose two basis points to 1.33 percent, leaving the yield spread between the securities and equivalent-maturity U.K. gilts at 123 basis points, down from a more than 15-year high of 127 basis points on May 12. Yields on similar-maturity U.S. debt added one basis point to 2.50 percent.

The Bank of England’s benchmark interest rate has been at a record-low 0.5 percent since March 2009. Policy makers said in their quarterly Inflation Report published this week that while the level of spare capacity in the economy had “narrowed slightly” in the past three months, there “remains scope to make greater inroads into slack before raising” rates.

Central bank officials also said they’ll start the process of tightening policy with rate increases, rather than selling some of the 375 billion pounds of gilts bought under a program of quantitative easing to stimulate the economy.

The pound climbed 0.2 percent to $1.6827, paring its decline this week to 0.2 percent. Sterling strengthened 0.3 percent to 81.49 pence per euro, set for a 0.3 percent gain this week.

The U.K. currency has risen 8.8 percent in the past 12 months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, as the strengthening economy boosted bets the BOE will hasten plans to increase borrowing costs. The euro added 4.6 percent, while the dollar fell 2.3 percent.

Gilts returned 4.2 percent this year through yesterday, Bloomberg World Bond Indexes show. German bonds also gained 4.2 percent and Treasuries earned 3.3 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins

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