Gilts Yield Climbs to Six-Week High on Job Gauge; Pound Weakens

U.K. government bonds fell, pushing 10-year yields to the highest level in six weeks, as an improved gauge of employment confidence weakened the case for the Bank of England to resume asset purchases.

Two-year gilt yields increased for the third day before the central bank’s Monetary Policy Committee starts a two-day meeting tomorrow. Gilts also slipped as German factory orders unexpectedly jumped in March, sapping demand for the safest assets. Bank of England Governor Mervyn King has been outvoted in his attempts to expand the central bank’s 375 billion-pound ($581 billion) asset-purchase target, or quantitative easing, in the last three policy meetings. The pound weakened.

“Investors might be thinking gilt yields at these levels look quite rich and we’re seeing a bit of a correction as people anticipate that the Bank of England will not be extending quantitative easing,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “On top of that equity markets are incredibly resilient.”

The 10-year yield climbed seven basis points, or 0.07 percentage point, to 1.79 percent at 4:26 p.m. London time after reaching 1.81 percent, the highest since March 26. The 1.75 percent securities maturing September 2022 fell 0.63, or 6.30 pounds per 1,000-pound face amount, to 99.64.

Gilts have lost 0.1 percent since the end of April, paring their gains this year to 1.6 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Bonds Volatility

Volatility on the British securities was the second-highest among 24 developed markets today, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

An index of employment confidence rose to minus 41 in April from minus 45 in March, Lloyds Banking Group Plc said. That’s the highest reading since October. A separate report from the British Retail Consortium showed a gauge of shop prices rose 0.4 percent in April after increasing 1.4 percent a month earlier.

U.K. stocks jumped with their European counterparts, pushing the FTSE 100 Index to its highest level since December 2007. Germany’s DAX Index gained 0.9 percent to an all-time intraday high.

Sterling weakened 0.6 percent to 84.46 pence per euro after appreciating to 83.98 pence on April 26, the strongest level since Jan. 24. The pound dropped 0.5 percent to $1.5456. It reached $1.5606 on May 1, the highest since Feb. 13.

Currency Indexes

The U.K. currency has appreciated 1.2 percent in the past month, the second-best performer after the Canadian dollar among 10 developed-market currencies tracked by Bloomberg Correlation Weighted Indexes, as data from gross domestic product growth to construction-industry output boosted bets the nation’s economy is improving. The euro rose 1.1 percent and the dollar gained 0.4 percent.

“Sterling has been outperforming other major currencies and overall it’s still in that direction for now,” said Neil Jones, head of hedge-fund sales a Mizuho Corporate Bank Ltd. in London. “The macro economic data has been more upbeat than the market has been expecting and this could filter through into the Bank of England.”

Royal Bank of Scotland Group Plc, the pound’s most accurate forecaster, sees the currency’s gains as an opportunity to sell because the next central bank governor will probably expand monetary easing to kick start the economy.

While Britain avoided a triple-dip recession in the first quarter, output remains below its 2008 peak and Bloomberg surveys show economists predict the country will underperform its Group of 10 peers over the next two years, according to Bloomberg surveys of economists. That leaves a challenge for Mark Carney, who takes over as governor in July.

“The pound will struggle to sustain these levels,” Paul Robson, senior currency strategist at RBS, said in a May 1 interview at his office in London. “As we get to the end of the summer, it’s likely that we’ll have more easing. With the growth outlook so poor, the Bank of England will have to do more.”

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