U.K. Bonds’ World-Beating Gains Become Losses Surpassing Peers

Major: Fair Value for Gilt Yields Nearer to 1% Than 0.5%
  • Global debt selloff is spurred by wagers QE reaching limits
  • Gilts lead losses amid buoyant economy since vote to quit EU

Spurred by a post-Brexit economy that’s defying the doomsayers, gilts are not only joining the global government-bond selloff but are leading it.

U.K. 10-year securities extended their slide today, having lost 1.2 percent in the week through Thursday, the biggest drop in Bloomberg World Bond Indexes. Sovereign securities are tumbling globally amid speculation major central banks are reaching the limits of their capacity to inject stimulus. Gilt yields are now higher than they were when the Bank of England cut interest rates and boosted asset purchases on Aug. 4.

The buoyancy of the U.K. economy since the June vote to leave the European Union is adding to the bond losses by potentially reducing the need for the BOE to act further. A slew of reports from services to construction have beaten economists’ forecasts this week. That’s aiding the selloff from a rally that was led by U.K. debt.

“We’ve seen a paring of positions and profit-taking after a very strong rally in gilts,” said Nick Stamenkovic, fixed-income strategist at Edinburgh-based broker RIA Capital Markets Ltd. “The economy has performed in a firmer fashion than many people anticipated post-Brexit, suggesting that fears of an imminent recession are widely off the mark.”

Long Bonds Lead

Longer-dated bonds, which had been supported by bets pension funds and insurers would be reluctant to part with their holdings in BOE buybacks, are leading the declines. The extra yield, or spread, that investors get for holding 30-year gilts instead of two-year securities climbed to a one-month high of 132 basis points.

The yield on benchmark 10-year bonds jumped 11 basis points, or 0.11 percentage point, to 0.87 percent as of 4:35 p.m. London time, the highest since July 21. The 1.5 percent security due in July 2026 fell 1.06, or 10.60 pounds per 1,000-pound ($1,326) face amount, to 105.98.

The yield slid to a record-low of 0.501 percent on Aug. 15. Gilts still returned 16 percent this year, the most in the world based on Bloomberg sovereign-bond indexes.

Even if the 10-year yield climbs toward 1 percent, as Steven Major of HSBC Holdings Plc expects, that would still be about a percentage lower than at the end of 2015.

“We’ve started this recent move from an overextended position, so gilts yields got way too low,” Major, global head of fixed-income research at HSBC in London, said in a Bloomberg Television interview. “Valuations on the gilts do not reflect” the economy, which has performed “better than expected.”

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