Gilts Slide on Growth Optimism; Pound Jumps

The pound strengthened for a second day against the dollar after an industry report showed U.K. services expanded at the fastest pace in six years in July, adding to signs the recovery is gathering momentum.

Sterling gained for a third day versus the euro after data last week showed U.K. manufacturing and construction both rose more than economists forecast. U.K. government bonds declined as demand for the safety of fixed-income securities waned. Five-year gilts dropped for a fifth day before the nation sells 4.5 billion pounds ($6.9 billion) of the securities tomorrow.

“It’s surprising the foreign-exchange market for sure, to see how upbeat some of the data is,” said Neil Jones, head of European hedge-fund sales at Mizuho Bank Ltd. in London. “The U.K. is doing better than people expected and consequently the market is running short of the pound.”

The pound gained 0.3 percent to $1.5332 at 4:31 p.m. London time after jumping 1.2 percent on Aug. 2, the biggest increase since June 6. Sterling advanced 0.4 percent to 86.45 pence per euro after appreciating to 86.31 pence, the strongest level since July 29.

A gauge of services output rose to 60.2 from 56.9 in June, Markit Economics and the Chartered Institute of Purchasing and Supply said in a statement in London today. The median prediction of 30 economists surveyed by Bloomberg was 57.4.

Britain’s economy will grow faster than previously forecast this year and next as consumers increase spending, the National Institute of Economic and Social Research said Aug. 2.

Inflation Report

Bank of England Governor Mark Carney will detail plans for forward guidance on interest rates in the central bank’s quarterly Inflation Report due to be released on Aug. 7.

“Near term, it looks like the numbers have been consistent, so that could continue to support the pound,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in London. “We have to worry about what’s coming up later this week with the Inflation Report on Wednesday. I don’t think the market will be terribly surprised about what it has to offer.”

The pound has appreciated 1.3 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro rose 4.3 percent and the dollar gained 3.1 percent.

The benchmark 10-year gilt yield rose five basis points, or 0.05 percentage point, to 2.47 percent after climbing to 2.49 percent on Aug. 2, the highest level since July 9. The 1.75 percent security due in September 2022 dropped 0.385, or 3.85 pounds per 1,000-pound face amount, to 94.135.

Five-year yields climbed six basis points to 1.38 percent, also the most since July 9.

Gilt Auction

The government last sold five-year securities on June 20 at an average yield of 1.422 percent, compared with 0.967 percent at the previous auction on May 14 and a record-low 0.787 percent set at a sale on Nov. 20.

“My bias remains that I would come out of that auction with a long position in five-year gilts,” said Sam Hill, a U.K. rates strategist at Royal Bank of Canada in London, referring to a bet the securities will rise. “In that part of the curve, what the Bank of England delivers will be supportive. They’ll make a commitment which underpins low rates. If we continue to get strong data which supports a recovery, that might mean higher yields further out the curve.”

The central bank kept its bond-purchase target at 375 billion pounds at its meeting on July 31-Aug. 1 and left its benchmark interest rate at a record-low 0.5 percent.

Carney joined the Bank of England last month from the Bank of Canada, where he introduced forward guidance in 2009.

Gilts lost 3.1 percent this year through Aug. 2, according to Bloomberg World Bond Indexes. Treasuries dropped 2.6 percent and German bonds declined 1.2 percent.

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