For U.K. government bonds, Chancellor of the Exchequer George Osborne’s special budget with a promise of lower borrowing wasn’t enough to distract investors focused on Greece’s plight.
Benchmark 10-year gilts dropped with their German peers, extending their decline even after the U.K. Debt Management Office cut its planned bond sales for the 2015-16 fiscal year by 3.5 billion pounds ($5.4 billion) to 127.4 billion pounds. The reduction was smaller than some banks, including Barclays Plc and Societe Generale SA, predicted. The pound weakened for a second day against the dollar and euro.
Greece faces a Sunday deadline to accept a rescue from its creditors or risk being expelled from the euro bloc. Greek officials requested a three-year loan from the European Stability Mechanism, according to a document obtained by Bloomberg. Gilts rose earlier on Wednesday, pushing 10-year yields to the lowest level in two months, as a decline in Chinese stocks spurred demand for the relative safety of fixed-income assets.
“Today, sentiment in all asset markets is being led by the combination of Greece and China,” said Owen Callan, a fixed-income strategist at Cantor Fitzgerald LP in Dublin. “On a normal day, the Osborne speech would have got a huge amount of focus, but given everything else going on and given that there were no massive shocks, people aren’t going to focus too much on it.”
Benchmark 10-year gilt yields rose seven basis points, or 0.07 percentage point, to 1.90 percent as of 4:15 p.m. London time. The 5 percent bond due in March 2025 dropped 0.67, or 6.70 pounds per 1,000-pound face amount, to 127.27. The yield earlier dropped to 1.78 percent, the lowest since May 8.
German 10-year bund yields increased five basis points to 0.69 percent.
The pound slid 0.7 percent to $1.5354, after falling as low as $1.5337, the lowest since June 9. It depreciated 1.2 percent to 72.08 pence per euro, the biggest decline since April 30.
Sterling, the best-performing major currency of the past three months, has been losing ground amid concern the standoff over Greece will harm Britain’s economy. It stayed lower even as Osborne as said he’ll maintain the pace of deficit reduction, rather than increasing it, easing concern that fiscal policy would act as a drag on growth and prompt the Bank of England to delay interest-rate increases.
BOE policy makers led by Governor Mark Carney will keep interest rates at a record-low 0.5 percent on Thursday, according to all 41 economists in a Bloomberg survey. Officials will maintain their asset-purchase program at 375 billion pounds, a separate survey suggests.
“A lot of positives on the sterling side have been priced in,” said Valentin Marinov, head of Group-of-10 currency research in London at Credit Agricole SA’s corporate and investment-banking unit. “Even if Grexit is avoided, the demand for the pound as a safe-haven proxy for the euro could wane.”