Gilts Fall on Bets Central Bank Buying Is Over; Pound Weakens
U.K. government bonds fell, pushing 10-year yields to the highest since April, amid speculation the Bank of England will refrain from resuming asset purchases this year and as sovereign debt dropped around the world.
Benchmark yields headed for the biggest weekly increase since January 2009 after the central bank said yesterday its Funding for Lending program helped increase the availability of mortgages and company loans. The pound weakened for a second day against the dollar after a report showed U.K. service industries shrank for the first time in two years. Investors demanded a higher yield to hold U.K. 10-year bonds instead of their French equivalents for the first time since April 2011.
The “credit conditions survey is relatively encouraging for the Funding for Lending Scheme and there is a focus away from gilt purchases,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “The backdrop to that is a risk-on tone, which has been needed for gilt yields to push higher. Yields above 2 percent are the right level in an environment where gilt purchases are not on the cards.”
The U.K. 10-year yield rose five basis points, or 0.05 percentage point, to 2.12 percent at 4:44 p.m. London time, after touching 2.14 percent, the highest since April 30. The 1.75 percent bond due in September 2022 fell 0.42, or 4.20 pounds per 1,000-pound ($1,603) face amount, to 96.76. The yield has jumped 30 basis points since Dec. 28, the most since the week ended Jan. 23, 2009.
The benchmark U.K. yield increased to as much as one basis point higher than its French equivalent.
Gilts have underperformed French securities since Standard & Poor’s lowered its outlook on Britain’s top credit rating to negative on Dec. 13, citing weak economic growth and a worsening debt profile.
“It means having to pay more for debt so that’s a problem” for the U.K., said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “Gilts are deemed a safe haven, so I would suggest to an extent this is gilts being sold as an unwinding of the safe-haven trade.”
Treasuries and German bunds also fell today as demand for safer assets waned. Treasury 10-year yields increased as much as six basis points to 1.97 percent and bund yields climbed eight basis points to 1.56 percent.
Gilts lost 2 percent this week through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German and French bonds both dropped 1 percent.
The pound weakened for the first time in three days against the euro after Markit Economics and the Chartered Institute of Purchasing and Supply said their gauge of U.K. services declined to 48.9 last month from 50.2 in November. A reading below 50 signals contraction.
“In all likelihood the U.K. is halfway towards a triple- dip recession,” said Nick Parsons, head of research for U.K. and Europe at National Australia Bank Ltd. in London. “We can see sterling below $1.60 in the near term and back at 83 per euro. We expect that fourth-quarter U.K. gross domestic product data on Jan. 25 will be negative.”
The U.K. currency declined 0.4 percent to $1.6045 after sliding to $1.6010, the weakest level since Dec. 7. Sterling depreciated 0.4 percent to 81.36 pence per euro.
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