Gilts Advance as Demand Increases at 10-Year Debt Auction

U.K. government bonds advanced after demand increased as the Debt Management Office sold 1.75 billion pounds ($2.78 billion) of 10-year securities.

Two-year yields fell from the highest level in a week after a report showed the budget deficit widened in December, spurring demand for safer assets. Investors bid for 2.9 times the amount of the 10-year securities allotted at the auction, up from a so-called bid-to-cover of 1.69 at the previous sale of similar-maturity bonds last month. The pound strengthened.

“We’ve had a pretty strong 10-year auction and the market was a little short,” said Simon Peck, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “For the next few weeks I think we’ll stay in a range in the 10 year. The 2 percent level has been tough to break.” A short position is a bet an asset will decline in value.

The benchmark 10-year gilt yield fell four basis points, or 0.04 percentage point, to 2.02 percent at the 5 p.m. close in London. The 1.75 percent security maturing September 2022 rose 0.315, or 3.15 pounds per 1,000-pound face amount, to 97.66. The two-year rate dropped one basis point to 0.40 percent after rising to 0.42 percent, the most since Jan. 11.

The Debt Management Office sold 4 percent securities due in March 2022 at an average yield of 1.897 percent. It last auctioned 10-year bonds on Dec. 11 at 1.803 percent.

U.K. government bonds handed investors a loss of 1.7 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.3 percent and Treasuries fell 0.3 percent.

Pound Gains

The pound advanced against the dollar, snapping a seven-day decline, and rose from an almost 11-month low versus the euro.

The U.K. currency strengthened 0.2 percent to 83.93 pence per euro after depreciating to 84.41 pence, the weakest level since Feb. 29. Sterling gained 0.2 percent to $1.5856 after falling to $1.5806 yesterday, the lowest since Aug. 31.

The pound is poised to strengthen versus the dollar after its recent decline, according to BNP Paribas SA. Strategists including London-based James Hellawell recommended buying the U.K. currency at $1.5860 in an e-mailed report today. The pound may appreciate toward $1.6185, they wrote.

The pound dropped 2.5 percent this year, the worst performance among the 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 1.2 percent and the dollar gained 0.3 percent.

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