U.K. Gilts Decline Amid Supply, Inflation Concerns; Pound Rises

U.K. gilts declined for the first week in five as the nation began its funding program for the fiscal year starting this month and amid concern inflation may accelerate, reducing the value of fixed payments from bonds.

The yield on benchmark 10-year securities rose from the lowest in seven months as a sale of the bonds attracted the least demand since June. The 10-year break-even rate, an index of annual inflation expectations, climbed to the highest level in more than 4 1/2 years after the nation sold index-linked debt at an auction. The pound strengthened for a second week against the dollar as a report showed U.K. industrial production increased more than economists forecast in February.

“Gilts had a pretty good run and there was a very low yield level,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “The data this week was OK, and 10-year yields below 2 percent, with inflation likely to push up to 3 percent in coming months, does make gilts’ upside limited in terms of price.”

The 10-year yield rose 10 basis points, or 0.1 percentage point, to 1.73 percent as of 5 p.m. London time yesterday, the first increase since the five days through March 8. It fell to 1.625 percent on April 8, matching the April 5 low, which was the least since Sept. 5. The 1.75 percent bond due September 2022 dropped 0.83, or 8.3 pounds per 1,000-pound ($1,537) face amount, to 100.20.

The Debt Management Office sold 3.5 billion pounds of 10-year gilts on April 9 as it began its 151 billion-pound issuance program for the 12 months through March 2014. Investors bid for 1.68 times the amount of securities allotted, down from a so-called bid-to-cover of 2.25 in February. The U.K. also sold 1.6 billion pounds of inflation-linked bonds on April 11.

Break-Even Rate

The 10-year break-even rate, derived from the difference in yield between gilts and index-linked securities, climbed four basis points to 3.29 percentage points this week after touching 3.39 on April 11, the most since September 2008.

U.K. industrial output rose 1 percent in February, after dropping 1.3 percent the previous month, the Office for National Statistics said April 9, beating economists’ forecasts of an increase of 0.4 percent.

The pound rose 0.2 percent in the week to $1.5366. It climbed to $1.5412 on April 11, the most since Feb. 20. Sterling depreciated 0.6 percent to 85.19 pence per euro.

The pound has declined 4.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar climbed 1.8 percent and the euro gained 0.9 percent.

Debt Sales

The DMO is scheduled to sell 2.25 billion pounds of gilts due in 2044 on April 18, while a report on April 16 is forecast by economists to show the annual inflation rate held at 2.8 percent in March, above the Bank of England’s 2 percent target.

The debt office said on its website yesterday it will auction index-linked gilts due in 2062 in a so-called mini-tender operation on April 30. Further details will be announced on April 19, it said.

Gilts returned 1 percent this year through April 11, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 0.5 percent and Treasuries rose 0.3 percent.

Before it's here, it's on the Bloomberg Terminal.