U.K. Gilt Yields Rise to Highest Since 2011 on Fed Taper Outlook

U.K. government bonds fell, with 10-year yields climbing to the highest level since October 2011, as government securities slid around the world amid speculation the Federal Reserve is moving closer to reducing debt purchases.

Ten-year gilts dropped for a third day before the Debt Management Office sells bonds maturing in 2068 via banks this week. Benchmark U.K. yields jumped the most since January 2009 last week as Fed Chairman Ben S. Bernanke said on June 19 that U.S. policy makers may begin to reduce monetary stimulus this year and end it in mid-2014. The pound reached a two-week low against the dollar.

“Undoubtedly the gilt move is related to the message from the Fed last week,” Jason Simpson, a U.K. rates strategist at Banco Santander SA in London. “People are very worried that all asset markets are selling off at the same time because stimulus boosted the value of all asset classes, and if that’s coming to an end then people think it’s natural for all asset classes to start deflating.”

The U.K. 10-year gilt yield rose 13 basis points, or 0.13 percentage point, to 2.54 percent at 4:40 p.m. in London after climbing to 2.59 percent, the highest level since Oct. 31, 2011. The 1.75 percent bond due in September 2022 fell 1.02, or 10.20 pounds per 1,000-pound face amount, to 93.52.

The benchmark yield, which has risen 41 basis points in the past three days, will increase to 3.10 percent by March 31, Banco Santander’s Simpson said.

BOE Minutes

Minutes released on June 19 from this month’s Bank of England meeting showed policy makers took note of rising global bond yields and their impact on U.K. interest-rate expectations. At its June 6 meeting, the Monetary Policy Committee voted 6-3 in favor of maintaining its 375 billion-pound asset-purchase target unchanged.

Gilts handed investors a loss of 3.6 percent this year through June 21, according to Bloomberg World Bond Indexes. German bonds dropped 1.9 percent and Treasuries declined 2.8 percent, the indexes show.

The pound reached the weakest since June 5 against the dollar as the U.S. currency strengthened versus most of its major counterparts on the prospect of the Fed closer to ending monetary stimulus that tends to devalue a currency.

“The Fed has laid out its cards and that’s washing through markets,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “In that environment, cable will be biased to drifting lower,” he said, referring to the pound-dollar exchange rate. “There’s no reason we can’t go back to $1.50 in the next couple of weeks.”

The pound was little changed at $1.5413 after falling to $1.5344. The U.K. currency strengthened 0.1 percent to 85.04 pence per euro.

Sterling has strengthened 4.7 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 4.3 percent and the dollar climbed 3.3 percent.

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