U.K.-German Bond Yield Spread Touches Widest Mark Since June

  • Data forecast to show U.K. economy grew 0.6% in third quarter
  • ECB stimulus signals boosted sterling versus euro last week

The premium investors demand to hold U.K. 10-year government bonds over their German peers touched the most since June amid speculation the Bank of England is still moving closer to raising interest rates even as the European Central Bank looks set to expand stimulus.

Sterling held a two-day advance against the euro, having reached a two-month high on Friday after ECB President Mario Draghi signaled a day earlier that he will extend asset purchases, or quantitative easing, in the currency bloc. The pound gained for the first time in five days versus the dollar even after BOE Governor Mark Carney said that a rate move was “a possibility, not a certainty” in an interview with the Mail on Sunday newspaper.

“Not withstanding Carney’s comments, we still do think there’s scope for the relative underperformance of the U.K. as we’re talking about policy tightening rather than easing in contrast to the ECB,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “Even with ECB QE and the global backdrop as it is, it’s tough to have any macro model that has a fair value for gilts yielding less than 2 percent.”

The 10-year gilt yield fell three basis points, or 0.03 percentage point, to 1.83 percent as of 4:11 p.m. London time. It jumped six basis points on Oct. 23, the biggest daily increase in almost three weeks. The 2 percent bond due in September 2025 rose 0.31, or 3.10 pounds per 1,000-pound ($1,536) face amount, to 101.56.

Spread Widens

The yield difference between 10-year gilts and similar-maturity German bunds was at 133 basis points after reaching 137 basis points, the most on an intraday basis since June 29.

The U.K. Debt Management Office plans to sell 3 billion pounds of the benchmark 10-year gilts on Tuesday.

Economic data are buoying speculation of higher borrowing costs even as forward contracts based on the sterling overnight index average, or Sonia, suggest that a full 25 basis-point increase in the BOE’s key rate won’t come until after December 2016.

A report due on Tuesday will show the U.K.’s gross domestic product expanded 0.6 percent in the third quarter, according to a Bloomberg survey of economists. Separate reports this week are forecast to show improvements in mortgage approvals and consumer confidence.

Sterling was little changed at 71.94 pence per euro after reaching 71.69 pence on Oct. 23, its strongest level since Aug. 21. The pound rose 0.3 percent to $1.5358, after sliding 1 percent over the previous four days.

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