Gilts Decline on U.K. Mortgage Approvals, China’s Growth Pledge
U.K. government bonds fell, with 10-year yields rising the most in two weeks, as an industry report showing U.K. mortgage approvals increased in June added to signs Britain’s economy is improving.
Gilts dropped along with sovereign securities in Germany and the U.S. as China’s premier pledged economic growth of at least 7 percent, reducing demand for the safety of fixed-income assets. The U.K. sold 4 billion pounds ($6.14 billion) of inflation-linked bonds through banks, paying a positive yield for the first time since November. The pound weakened against the euro.
“The longer and stronger the signs of U.K. economic recovery the less likely it is we’ll see any resumption of quantitative easing and that’s been a key factor driving gilt yields down,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. Europe’s “outlook has become a bit more balanced. That particularly tends to coincide with slightly higher safe-haven yields,” he said.
The U.K. 10-year yield climbed five basis points, or 0.05 percentage point, to 2.31 percent at the 5 p.m. close of trading in London, the biggest increase since July 5. The 1.75 percent bond due in September 2022 fell 0.37, or 3.70 pounds per 1,000-pound face amount, to 95.45.
U.K. mortgage approvals increased to 37,278 in June from a revised 36,290 the previous month, the British Bankers Association said in a report. Gross mortgage borrowing rose to 8.9 billion pounds in June from 8.7 billion pounds in May.
U.K. economic growth doubled to 0.6 percent in the second quarter from the previous three months, according to a Bloomberg News survey before the government releases the data on July 25.
Chinese Premier Li Keqiang’s government sees 7 percent growth as the bottom line for tolerance of an economic slowdown, Chinese news organizations reported, signaling the nation will act to support expansion if needed.
The German 10-year yield increased four basis points to 1.55 percent and the yield on similar-maturity Treasuries climbed two basis points to 2.50 percent.
The U.K. 10-year yield rose to 2.59 percent on June 24, the highest since October 2011, as the economy showed signs of gaining momentum since returning to growth in the first quarter. Yields have increased from 1.83 percent on Dec. 31.
The Bank of England announces its next policy decision on Aug. 1 after kept its bond-purchase target at 375 billion pounds on July 4. The nine-member Monetary Policy Committee also left the key interest rate at a record-low 0.5 percent.
The pound declined 0.2 percent to 86.03 pence per euro and was little changed at $1.5356.
Sterling has strengthened 1.5 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The euro rose 2.5 percent and the dollar climbed 0.7 percent.
“The U.K. economy will improve and that will attract overseas investors to buy the pound and so I am reasonably optimistic on the pound in the short term,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “Domestically and internationally we are underestimating the recovery.”
The U.K. Debt Management Office said it sold 0.125 percent inflation-linked bonds due in 2044 at a price of 100.922. That is equivalent to a real yield of 0.0945 percent, compared with minus 0.234 percent at the previous offering on May 8. Local investors took 93 percent of the bonds, the DMO said.
The outlook for inflation climbed from the lowest in a month, bond trading showed.
The U.K. 30-year break-even rate widened one basis point to 3.44 percentage points after shrinking to 3.42 percentage points, the narrowest since June 20.
The gauge measures investor expectations of price increases over the lifetime of the debt and is derived from the yield difference between gilts and inflation-protected securities.
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