Gilts Yields Rise Most in Two Weeks as Supply Rises, Stocks Gain

U.K. government bonds declined, with 10-year yields rising the most in two weeks, as the Debt Management Office increased planned sales of gilts by 4.7 billion pounds ($7.18 billion) this year.

Two-year yields climbed to the highest level in six weeks as European and U.S. stocks advanced, undermining demand for safer assets. Gilts also fell as Britain’s budget deficit narrowed more than economists forecast in March. The slide in gilts increased the extra yield investors demand to hold the U.K. securities instead of similar-maturity German bunds. The pound strengthened against the euro.

“Although these borrowing data were not a surprise for the market, other forecast revisions, including 7.1 billion-pound upward revision in the central government net cash requirement for 2012-2013, have consequently resulted in a revision of this year’s funding remit,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “Perhaps that’s why gilts underperformed bunds.”

The 10-year gilt yield climbed four basis points, or 0.04 percentage point, to 1.70 percent at 4:26 p.m. in London after falling to 1.62 percent, the lowest level since Sept. 5. The 1.75 percent bond maturing in September 2022 dropped 0.38, or 3.80 pounds per 1,000-pound face amount, to 100.47.

The two-year yield rose as much as five basis points to 0.28 percent, the highest level since March 8.

Extra Supply

The U.K. debt office said it raised its planned bond sales for the fiscal year started this month to 155.7 billion pounds. The extra sales will include 300 million pounds more short-dated gilts, 2.5 billion pounds more medium-maturity gilts, 900 million pounds of extra longer-dated securities and 1 billion pounds more index-linked debt, it said in a statement.

The U.K.’s budget shortfall excluding temporary support for banks was 15.1 billion pounds, compared with 16.7 billion pounds a year earlier, the Office for National Statistics said in London. The median forecast in a Bloomberg News survey was for a deficit of 15.5 billion pounds.

The extra yield investors demand to hold 10-year U.K. securities instead of German bunds increased for a second day, rising three basis points to 45 basis points. The spread shrank to 39 basis points yesterday, the narrowest since Feb. 4.

The Stoxx Europe 600 Index of shares rose 2.3 percent and the Standard & Poor’s 500 Index gained 1 percent.

U.K. gilts returned 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 0.9 percent and Treasuries rose 0.8 percent.

Pound Gains

The pound strengthened for a second day against the euro after a European report showed services and factory output shrank for a 15th month in April, adding to pressure on the region’s central bank to cut interest rates.

The U.K. currency advanced 0.3 percent to 85.21 pence per euro after gaining 0.3 percent yesterday. Sterling was little changed at $1.5280.

The pound has weakened 3.4 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.6 percent and the euro rose 2 percent.

The data today “doesn’t change the bigger picture of the country’s economic outlook which is weak,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “The pound is likely to remain under pressure and we see any rebound as an opportunity to sell.”

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