U.K. Bonds Tumble as Housing Data Point to an Improving Economy

  • Timing of first rate increase brought forward: money markets
  • Pound heads for second consecutive annual gain versus euro

U.K. government bonds declined, pushing 10-year yields to the highest level since November, as the biggest jump in house prices in eight months signaled that this key sector of the nation’s economy remains resilient.

The extra yield, or spread, that investors get for holding 10-year gilts instead of German bunds increased. U.K. securities have lagged behind their euro-zone counterparts this year as the Bank of England debates when to start raising interest rates, while the European Central Bank expands the monetary base through asset purchases and cutting borrowing costs. This policy split has also supported the pound, which climbed 5 percent versus the euro in 2015.

The Federal Reserve raised U.S. interest rates for the first time in nearly a decade this month, and market pricing signals that the BOE will follow before the ECB. Forward contracts based on the sterling overnight index average, or Sonia, price in a quarter-point increase to the U.K.’s 0.5 percent main rate next November, compared with the first quarter of 2017 as of Tuesday.

“We are slightly bearish” on gilts, with yields likely to rise in the New Year, said Jason Simpson, a strategist at Societe Generale SA in London. “The more natural thing is to be bearish. It’s similar to coming into 2015, but the difference is that the Fed is raising rates. It’s finely balanced.”

Yields Rise

The benchmark 10-year gilt yield rose nine basis points, or 0.09 percentage point, to 1.99 percent as of 4:17 p.m. London time, after reaching 2 percent, the highest since Nov. 17. The 2 percent bond due September 2025 fell 0.795, or 7.95 pounds per 1,000-pound ($1,484) face amount, to 100.075.

The securities yielded 136 basis points more than German 10-year bunds, nine basis points more than on Tuesday.

The pound strengthened 0.2 percent to 73.57 pence per euro, set for a second straight annual gain. Sterling rose for the time in three days versus the dollar, climbing 0.2 percent to $1.4840. The U.K. currency has fallen almost 5 percent against the dollar this year, adding to 2014’s 5.9 percent slide.

The average price of a U.K. home rose 0.8 percent in December to 196,999 pounds, Nationwide Building Society said in a statement.

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