Gilts Extend Biggest Slump in Three Years on Consumer Confidence

U.K. government bonds fell, with 10-year yields posting the biggest monthly increase in more than three years, as a report showed consumer confidence improved this month, weakening the case for additional monetary stimulus.

Gilts also fell with Treasuries as U.S. reports indicating stronger growth added to evidence the economic recovery is accelerating. A U.K. sentiment index by GfK NOP Ltd. increased to minus 22 from minus 27 in April, the London-based group said today. The pound rose against the euro for the first time in three days after a report showed the jobless rate in the 17-nation currency bloc surged to a record in last month.

“While the U.K. economy is still weak, any signs of stabilization will fuel speculation that the quantitative easing will be on hold,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Some improvement in economic data in the U.K. and talk about the timing of the Federal Reserve tapering stimulus have caused a sharp selloff in U.K. gilts.”

Ten-year gilt yields rose four basis points, or 0.04 percentage point, to 2 percent at 5:09 p.m. London time. The 1.75 percent security due September 2022 fell 0.29, or 2.90 pounds per 1,000-pound ($1,517) face amount, to 97.88. The yield has risen 31 basis points since April 30, the biggest increase since December 2009.

Overseas Investors

A report from the Bank of England today showed overseas investors sold a net 3.86 billion pounds of gilts in April, the first net outflow in 10 months.

Business activity in the U.S. rebounded in May, with the MNI Chicago Report’s barometer rising to 58.7 to exceed all forecasts in a Bloomberg survey and reach the highest since March 2012. The Thomson Reuters/University of Michigan final index of sentiment increased to 84.5 in May, the strongest since July 2007.

Policy makers have been split in recent months on whether the economy needs further quantitative easing, with Governor Mervyn King voting since February in the minority for more bond purchases. The nine-member Monetary Policy Committee will keep quantitative easing at 375 billion pounds, according to the median estimate of economists in a Bloomberg News survey before the June 6 decision, the last meeting before bank of Canada Governor Mark Carney replaces King on July 1.

Sterling appreciated 0.2 percent to 85.47 pence per euro. It dropped 0.4 percent to $1.5178 after rising to $1.5240, the strongest level since May 21.

The euro-area unemployment rate rose to 12.2 percent from 12.1 percent in March, the European Union’s statistics office in Luxembourg said today, in line with the median estimate of economists surveyed by Bloomberg News.

Mortgage Lending

Sterling has fallen 2.5 percent this year, the worst performer after the yen and Australian dollar among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. currency gained 5.2 percent and the euro strengthened 3.3 percent.

Gilts rose earlier as a report showed mortgage lending stagnated last month, signaling that the economic recovery remains uneven.

Lenders granted 53,710 home loans compared with a revised 53,674 in March, the Bank of England said today. The median estimate of economists was for an increase to 54,600.

“The economic outlook is still not very encouraging in the U.K. despite some improvement,” said Annalisa Piazza, a fixed-income analyst at Newedge Group in London. “Weak data from the U.K. as well as from the euro zone suggests monetary policy will stay accommodative. That and declining stocks help to support demand for government bonds.”

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