Gilts Decline for Second Day as U.K. Manufacturing Gauge Rises

U.K. 10-year government bonds fell with German bunds for a second day as gauges of British and euro-area manufacturing rose, damping demand for the safest fixed-income assets.

Benchmark 10-year gilt yields climbed to a two-week high after a Confederation of British Industry gauge of U.K. factory orders reached the highest level this year. Gilts slid before a report tomorrow that economists said will show growth in gross domestic product accelerated in the second quarter. An index based on surveys of purchasing managers in the euro area showed manufacturing output unexpectedly expanded in July. The pound snapped a six-day advance versus the dollar.

“Strong PMIs in Europe are weighing on bunds and driving the general move in core fixed-income yields higher,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. If the GDP report beats expectations “that will continue to weigh quite heavily on gilts in terms of driving further underperformance, cementing the view that data is indeed starting to pick up in the U.K.,” he said.

The 10-year gilt yield climbed nine basis points, or 0.09 percentage point, to 2.40 percent at 4:45 p.m. London time. It reached 2.41 percent, the highest since July 10. The 1.75 percent bond maturing in September 2022 fell 0.71, or 7.10 pounds per 1,000-pound ($1,536) face amount, to 94.74.

A gauge of U.K. factory orders increased to minus 12 this month from minus 18 in June, according to the CBI figures released today. That matched the median estimate of 13 economists in a Bloomberg News survey.

Manufacturing Index

The euro-area manufacturing index rose to 50.1 from 48.8 in June, London-based Markit Economics said. That exceeds the median estimate of 49.1 in a Bloomberg News survey. A reading above 50 indicates growth. A preliminary index of U.S. manufacturing increased also increased in July, Markit Economics also said today.

Gilts handed investors a loss of 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds fell 0.8 percent and Treasuries declined 2.3 percent.

Sterling was little changed at $1.5362 after rising to $1.5392 yesterday, the highest level since June 26. The pound traded at 86.11 pence per euro after touching 85.82 yesterday, the strongest since July 10.

GDP increased 0.6 percent in the three months ended June from the first quarter, when it rose 0.3 percent, according to the median forecast in a Bloomberg News survey. The scope for the pound to rise on the data may be limited, said Valentin Marinov, head of European Group-of-10 currency strategy at Citigroup Inc. in London.

Rallies Accentuated

“Recent sterling rallies across the board became more accentuated when U.K. data was coming in better than expected,” Marinov wrote in an e-mailed note. “The bar for positive surprises ahead of the GDP tomorrow maybe a tad too high, however, and we remain cautious about the near-term outlook for sterling.”

Sterling has weakened 1.7 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro climbed 5 percent and the dollar rose 4.6 percent.

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