Gilt Yields Drop Most in 3 Weeks as Stocks Decline; Pound Gains

U.K. government bonds rose, with 10-year yields falling the most in three weeks, as a decline in European and U.S. stocks revived demand for safer assets.

Gilts gained along with Treasuries and German bunds after a U.S. report showed the world’s biggest economy grew less than analysts forecast last quarter. U.K. government securities slid yesterday when data showed Britain’s gross domestic product expanded in the first three months of the year, enabling the nation to avoid a recession. The pound strengthened for a third day against the dollar.

“Gilts are moving in the same direction as German and U.S bonds as stocks decline,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “The GDP data yesterday might be a relief but this is still essentially a story about stagnation and sub-trend growth. Gilt yields are likely to remain low in this environment.”

The benchmark 10-year gilt yield dropped five basis points, or 0.05 percentage point, to 1.68 percent at 5 p.m. London time, the biggest drop since April 5. The 1.75 percent bond due in September 2022 gained 0.45, or 4.50 pounds per 1,000-pound ($1,548) face amount, to 100.615.

U.S. GDP grew at a 2.5 percent annual rate in the first quarter, the Commerce Department said in Washington, less than the median estimate of 3 percent in a Bloomberg News survey of economists.

The Stoxx Europe 600 Index of shares fell 0.3 percent and the Standard & Poor’s 500 Index declined 0.4 percent.

Pound Gains

The pound rose 0.3 percent to $1.5477, extending this week’s gain to 1.6 percent. The U.K. currency advanced 0.2 percent to 84.15 pence per euro after appreciating to 83.98 pence, the strongest level since Jan. 24.

Sterling surged versus all of its 16 major counterparts yesterday when the Office for National Statistics said U.K. GDP expanded 0.3 percent in the first quarter after shrinking 0.3 percent in the prior three months.

The Bank of England announces its next decision on May 9 after policy makers were split this month on the need to extend its 375 billion-pound program of asset purchases known as quantitative easing.

Short Squeeze

The U.K. “GDP report led to a squeeze of speculative short positions in the pound,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Quantitative easing is off the table for a while. In the near term the pound could go higher still but that would provide attractive levels to sell. The economy will struggle to grow going forward.”

A short squeeze is where traders are forced to buy back a security whose price is rising after they had earlier sold it expecting it to decline.

Bank of Tokyo-Mitsubishi predicts the pound will weaken to $1.45 by year-end, Hardman said.

The pound has advanced 2.3 percent in the past month, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Sterling has still weakened 2.6 percent this year.

U.K. gilts returned 1.3 percent in 2013 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 0.7 percent.

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