- Ten-year yield rises from record low reached Thursday
- Benchmark 10-year gilts still set for third weekly advance
U.K. government bonds declined, pushing the 10-year gilt yield up from a record low set Thursday, as a rout in global markets showed signs of easing, reducing demand for the relative safety of fixed-income assets.
Benchmark 10-year gilts pared a third weekly advance as a report showed construction output rose less in December than economists forecast, adding to evidence that the British economy is losing momentum. That would normally support bonds as it reduces the likelihood of higher interest rates from the Bank of England. The pound strengthened versus most of its 16 major peers.
“When you get a move of that magnitude like yesterday there is always some sort of retracement once things calm down a bit,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “With the exception of Japan, where their stock markets were playing catch-up after a holiday yesterday, Asian equities had a stable session, the oil price came off its lows and almost as a knee-jerk response we have opened with yields a little bit higher,” he said.
The benchmark 10-year gilt yield increased 10 basis points, or 0.1 percentage point, to 1.41 percent at 4:15 p.m. London time, after dropping to 1.226 percent on Thursday, the lowest since Bloomberg began collecting the data in 1989. The 2 percent security due in September 2025 fell 0.94, or 9.40 pounds per 1,000-pound ($1,445) face amount, to 105.30.
Gilts gained 6 percent this year through Thursday, according to Bloomberg World Bond Indexes, the highest return among developed sovereign markets, while the pound slumped against all except two of its Group-of-10 peers on speculation that global market turmoil will prevent the BOE from raising U.K. rates soon. Sterling has also been restrained by the possibility of a referendum later this year on Britain’s European Union membership.
Forward contracts based on the sterling overnight index average, or Sonia, project the chances of a 25-basis-point cut in the BOE’s official bank rate by the December meeting were about 64 percent. As recently as the turn of the year, a boost in November was fully priced in.
The pound strengthened 0.6 percent to 77.78 pence per euro Friday, paring this week’s decline to 1.1 percent. Sterling fell for a second day versus the dollar, dropping 0.2 percent to $1.4454.