U.K. 30-Year Gilts Drop Fourth Day on Sale as Notes Rally on BOE

U.K. 30-year bonds declined for a fourth day as the Debt Management Office sold 5 billion pounds ($7.7 billion) of securities due in 2068 via banks, the longest-ever maturity for a conventional gilt.

Thirty-year securities underperformed their shorter-maturity peers after the extra yield over 10-year bonds shrank to the least in 15 months. Two-year gilts rose for the first time in seven days as Bank of England policy makers said the growth outlook remained modest and further asset purchases were possible. Governor Mervyn King, who retires at the end of the week, told lawmakers that the U.K. economic recovery is too weak to be satisfactory. The pound fell versus the dollar.

“The longer end of the curve has been incredibly resilient and we’ve seen a big flattening between the 10- and 30-year but that seems to have come to an end today,” said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “The market seems to be finally positioning for not just the gilt syndication today, but more longer-dated supply during the third quarter.”

The 30-year gilt yield rose three basis points, or 0.03 percentage point, to 3.62 percent at 4:44 p.m. London time after climbing to 3.66 percent yesterday, the highest since September 2011. The 3.25 percent security maturing in January 2044 fell 0.59, or 5.90 pounds per 1,000-pound face amount, to 93.195.

The yield difference, or spread, between 30-year gilts and 10-year securities widened three basis points to 108 basis points after narrowing to 103, the least since March 21, 2012.

The benchmark 10-year yield was little changed at 2.54 percent, while the two-year rate fell three basis points to 0.52 percent.

Debt Sale

The 2068 securities, known as super-long bonds, were priced to yield 3.651 percent, or 3.5 basis points more than that of gilts due in 2060, according to the debt office.

“Long-dated gilt yields have backed up significantly to levels unseen in nearly two years and the syndication today offered a yield that looks very attractive to investors as a result,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “The market has been volatile and our view is that the selloff in the U.K. market is overdone given the outlook of the economy.”

Bank of England Deputy Governor Charles Bean said in a letter to the Treasury Select Committee that additional asset purchases and targeted policies would be more reliable tools for boosting growth than lower interest rates.

Selloff ‘Excessive’

“The selloff in the past few days was excessive and was not consistent with the U.K. economic outlook,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Bank of England policy makers confirmed that point in their testimony to Parliament today.”

King said the global economic recovery is at risk of further setbacks and central banks are a long way off tightening monetary policy.

“Clearly the level of interest rates and the scale of asset purchases will have to be unwound and we must return to more normal conditions at some point,” King said in testimony to lawmakers at the Treasury committee in London. “That point is not today.”

Five-year gilts offer value as the Bank of England’s policy is likely to remain accommodative, according to David Hooker, a money manager at Insight Investment Management Ltd. in London, which oversees the equivalent of $394 billion.

“If you look at the U.K., we are not at the stage yet of wanting to reduce stimulus to the economy,” Hooker said at the Euromoney Global Borrowers and Investors Forum in London. “The U.K. is in a very different position to the U.S. and it will lag in the interest-rate cycle. Five-year gilts are a good example. I’d buy it outright against cash.”

Bond Returns

U.K. gilts handed investors a loss of 4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.2 percent and Treasuries declined 2.9 percent, the indexes show.

Short-sterling futures for March 2014 rose for the first time in four days, a sign traders were reducing bets on higher borrowing costs. The implied yield on the contract fell seven basis points to 0.76 percent.

The pound fell 0.1 percent to $1.5412 after declining to $1.5344 yesterday, the lowest level since June 5. The U.K. currency was little changed at 84.89 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 4.9 percent and the dollar climbed 2.9 percent.

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