Gilt Yields Rise Most in Four Years on U.S. Budget Deal OptimismNeal Armstrong
U.K. government bonds fell, pushing 10-year yields to the biggest weekly gain in four years, as U.S. lawmakers reached a deal to avert automatic tax increases and spending cuts, curbing demand for the safest assets.
The drop sent 10-year rates above 2 percent for the first time since May 10. German bunds and U.S. Treasuries slid and stocks rose as economic data added to evidence the U.S. recovery is being sustained. The Bank of England said on Jan. 3 its Funding for Lending credit-boosting program had increased mortgage and company loan availability. Policy makers meet Jan. 10 to consider extending quantitative-easing stimulus measures. The pound fell for a third week against the dollar.
“There has been a big improvement in risk appetite after U.S. fiscal negotiations seemed to go the right way and that has been the principal mover of gilts,” said Jason Simpson, a fixed-income strategist at Banco Santander SA in London. “We are bearish on gilts because we don’t think the BOE is going to come back in with more asset purchases. The Funding for Lending scheme seems to be gaining a bit of traction.”
Benchmark yields rose 30 basis points, or 0.30 percentage point, since Dec. 28, the biggest weekly gain since January 2009. They touched 2.14 percent yesterday, the most since April 30. The yield fell to a record 1.41 percent on July 23. The 1.75 percent bond maturing in September 2022 fell 2.58, or 25.80 pounds per 1,000-pound ($1,603) face amount, to 96.78 at 5 p.m. London time yesterday.
The pound fell 0.7 percent to $1.6036. It touched $1.6010, the lowest level since Dec. 7, after a report yesterday showed U.K. services unexpectedly shrank for the first time in two years in December, clouding the economic outlook as Britain struggles to avoid a triple-dip recession. Sterling gained for the first week in four against the euro, appreciating 0.5 percent to 81.36 pence.
Gilts have underperformed their counterparts in Germany and France since Standard & Poor’s lowered the outlook on Britain’s top credit rating to negative on Dec. 13, citing weak economic growth and a worsening debt profile.
The extra yield investors demand to hold 10-year gilts instead of bunds widened to 59 basis points on Jan. 3, the most since September 2011. Yields on the U.K. bond climbed above those of its French equivalent for the first time since April 2011 yesterday.
The Bank of England will announce its latest decision on monetary policy next week, with all economists in a Bloomberg survey forecasting asset purchases will be kept at 375 billion pounds and a separate survey forecasting interest rates will remain at a record-low 0.5 percent. The Debt Management Office plans to sell as much as 1.5 billion pounds of securities maturing in 2030 on Jan. 8.
Gilts lost 2 percent in the week through Jan. 4, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Germany’s bonds dropped 1 percent and those of France slid 0.9 percent.