U.K. Bonds Decline as Equities' Rally Damps Demand for Safety

  • Pound Falls as U.K. Services Expand at Slowest Pace Since 2013
  • Sonia signals no BOE rate increase seen until after Nov. 2016

U.K. 10-year government bonds declined for the first time in three days as European stocks rallied, damping demand for fixed-income assets.

Ten-year gilt yields climbed from the lowest level in more than five months even as a report showed U.K. services grew at their slowest pace in more than two years in September. The data helped spur wagers that the Bank of England will be unable to raise interest rates even in 2016. Investors pushed back calls for the Federal Reserve to do likewise following U.S. payrolls data last week that missed analysts estimates in a Bloomberg survey. The pound declined versus most of its 16 major peers.

The move in gilts “is part reversal of Friday’s moves,” said Jason Simpson, a London-based fixed-income strategist at Societe Generale SA. It was because “risk assets have rallied and knocked gilts back.”

Benchmark 10-year gilt yields rose nine basis points, or 0.09 percentage point, to 1.79 percent as of 4:08 p.m. London time. The 2 percent bond due in September 2025 fell 0.78, or 7.80 pounds per 1,000-pound ($1,518) face amount, to 101.935. The yield reached 1.65 percent at the end of last week, the lowest since Apr. 27, after the U.S. jobs data.

Equities Climb

The Stoxx Europe 600 Index of shares jumped 2.9 percent and the FTSE 100 Index climbed 2.6 percent. Yields on German 10-year bunds, Europe’s benchmark sovereign securities, increased five basis points to 0.56 percent.

Forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase to the BOE’s 0.5 percent main rate will not come until after November 2016.

The U.K. Debt Management Office plans to auction 1.5 billion pounds of gilts due in September 2034 on Tuesday.

Markit Economics said its Purchasing Managers’ Index for services fell to 53.3 last month, its lowest level since April 2013. That’s down from 55.6 in August and compared with the lowest estimate in a Bloomberg survey of economists of 54.7. A reading above 50 indicates expansion.

“That was a nasty surprise,” said Stuart Bennett, London-based head of Group-of-10 currency strategy at Banco Santander SA. While the PMI number “doesn’t derail the economy completely, with that sort of decline, even the sterling bulls over the past week or so will think ‘Hang on a second, do I want to be long sterling into the end of the year?’”

A long position is an investment that will benefit from an asset’s appreciation.

The pound was little changed at 73.87 pence per euro after reaching 74.43 pence on Oct. 2, its weakest level since May 7. Sterling was at $1.5179, having climbed as much as 0.4 percent made before the U.K. PMI data.

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