U.K. Gilt Yields Climb to Highest Since 2011 Amid Growth Signs

U.K. government bonds fell, pushing 10-year yields to the highest since October 2011, as reports showing inflation stayed above the central bank’s target and house prices rose sapped demand for fixed-income assets.

Ten-year yields jumped by the most in seven weeks before the Bank of England releases the minutes of its July 31-Aug. 1 policy meeting tomorrow. A market gauge of inflation expectations over the next five years climbed from the lowest in a month as investors bet consumer prices will keep rising. U.K. 10-year gilts underperformed all similar-maturity developed-market bonds, according to data from 24 sovereigns compiled by Bloomberg. The pound rose to a five-week high versus the euro.

“There’s clear evidence that growth is here, looking at economic surveys, inflation growth and house-price inflation,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “That’s all negative for gilts.”

The benchmark 10-year gilt yield increased 14 basis points, or 0.14 percentage point, to 2.60 percent at the 5 p.m. close of trading in London after reaching 2.61 percent, the highest since Oct. 28, 2011. The 1.75 percent bond maturing in September 2022 fell 1.045, or 10.45 pounds per 1,000-pound ($1,546) face amount, to 93.195.

The annual inflation rate fell to 2.8 percent in July from 2.9 percent in June, a government report showed, still above the central bank’s 2 percent target. An index of U.K. house prices climbed to 36 from 21 in June, the highest since November 2006, the Royal Institution of Chartered Surveyors said in a report.

Inflation Outlook

The five-year break-even rate, a gauge of expectations for inflation derived from the yield difference between regular and index-linked bonds, widened five basis points to 2.7 percentage points. It dropped to 2.64 percentage points yesterday, the lowest since July 2.

Bank of England Governor Mark Carney said when releasing the central bank’s quarterly Inflation Report on Aug. 7 that officials probably won’t raise the benchmark interest rate from a record-low 0.5 percent until unemployment falls to 7 percent. The plan includes a number of caveats, including two that are linked to inflation.

“The data has certainly been on a good run and the house-price data does suggest that the market is gaining in strength,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “The gilt market is certainly reacting to that but there are plenty more data points to come in the next few days, which could be equally instructive.”

Jobless Claims

The number of Britons claiming jobless benefits fell for a ninth month in July, according to a Bloomberg survey before the Office for National Statistics releases the number tomorrow.

U.K. gilts lost investors 3.5 percent this year through yesterday, Bloomberg World Bond Indexes show. German securities dropped 1.4 percent and Treasuries declined 2.6 percent.

The pound rose 0.3 percent to 85.73 pence per euro after appreciating to 85.35, the strongest level since July 4. The U.K. currency was little changed at $1.5453.

Sterling has gained 1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The euro was little changed, while the dollar weakened 1.5 percent.

The yield on U.K. 10-year bonds increased relative to all 23 of their developed-market peers, Bloomberg data show. The premium investors demand to hold gilts over German bunds widened three basis points to 79 basis points, while the spread of Italian bonds over their U.K. equivalents narrowed seven basis points to 163 basis points.

Short-sterling futures declined as investors bet the central bank will have to raise interest rates to counter inflation. The implied yield on the contract expiring in September 2016 increased 15 basis points to 1.99 percent.

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