The pound dropped to a 15-month low against the dollar after a report showed the current-account deficit widened in the third quarter, making sterling vulnerable to Britain’s dependence on foreign capital to plug the gap.
The U.K. currency weakened for a second day against the euro as the Office for National Statistics said today the deficit increased to a record 27 billion pounds ($42 billion) from 24.3 billion pounds in the second quarter. The rate of economic growth from a year ago was revised down to 2.6 percent from 3 percent despite an expansion in the three months through September that matched an earlier 0.7 percent estimate. U.K government bonds declined for the first time in three days.
“The pound weakened a bit after the data,” said Peter Kinsella, a senior currency strategist at Commerzbank AG in London. “I don’t think the market liked the fact that the current-account deficit worsened. The pound will probably move in a narrow range as people refrain from taking new positions before the new year.”
The pound fell 0.5 percent to $1.5511 at 4:36 p.m. London time after falling to $1.5486, the lowest since August 2013. Sterling weakened 0.1 percent to 78.52 pence per euro.
The U.K. currency has gained 5.6 percent in the past 12 months, the best performer after the dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Investors bet in the first half of the year that the BOE would hasten the timing of its first interest-rate increase since July 2007. The greenback surged 12 percent in that period, the euro dropped 1.7 percent and the yen fell 5 percent.
The 10-year gilt yield rose three basis points, or 0.03 percentage points, to 1.85 percent. The 2.75 percent bond due in September 2024 fell 0.245, or 2.45 pounds per 1,000-pound face amount, to 107.97.
Longer-dated gilts are outperforming short-dated U.K. securities by the most in three years as investors favor longer maturities while inflation remains subdued.
Securities due within three years returned 1.6 percent this year while those with maturities of 10 years or longer gained 23 percent through yesterday, according to Bank of America Merrill Lynch Bond Indexes. That’s the best performance of longer-dated gilts relative to their shorter-dated peers since 2011.
“Longer gilts have priced in much softer real growth than what it is now, and subdued inflation,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “That explains the outperformance.”
The 10-year break-even rate, a market gauge of inflation expectation derived from yield difference between nominal and index-linked bonds, rose two basis points to 2.63 percentage points. The average over the past 10 years was 2.86 percentage points.
Gilts returned 14 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities earned 9.9 percent and U.S. Treasuries 6.1 percent.