Gilts Fall Most in Three Months as BOE Holds Rates; Pound Drops

U.K. government bonds fell, with 10-year yields rising the most in three months, after data showed the U.K. recovery strengthening and as the Bank of England kept interest rates at a record-low to spur growth.

Sterling fell the most in two months against the euro after the European Central Bank signaled it would refrain from further stimulus. Chancellor of the Exchequer George Osborne announced upgraded forecasts for growth at his year-end financial statement after data based on surveys of purchasing managers showed manufacturing and construction expanded more than economists forecast and services output increased for an 11th month in November.

“The PMIs were far stronger than anyone thought they would be,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “The U.K. is everyone’s favorite short at the moment and the Office for Budget Responsibility picked up on that. The path of least resistance seems to be higher yields right now. I can’t see anything pushing them back at the moment.” A short position is a bet that an asset will decline in value.

The yield on 10-year gilts climbed 13 basis points, or 0.13 percentage point, in the week to 2.90 percent at 5 p.m. London time yesterday. That’s the steepest increase since the five days ended Sept. 6. The rate touched 2.98 percent yesterday, the most since Sept. 18. The 2.25 percent security due September 2023 fell 1.085, or 10.85 pounds per 1,000-pound ($1,632) face amount, to 94.5.

ECB Decision

The ECB left its benchmark interest rate at a record-low 0.25 percent and improved its growth forecast at its Dec. 5 policy meeting, saying that while the economy will contract 0.4 percent this year, it will expand 1.1 percent in 2014.

The Bank of England kept its main interest rate at 0.5 percent and its bond-buying stimulus target unchanged at 375 billion pounds on Dec 5.

The Office for Budget Responsibility said U.K. gross domestic product will grow 1.4 percent this year, up from a previous projection of 0.6 percent.

“Osborne came out with upgraded forecasts for GDP in 2014, which is very well received,” said Peter Kinsella, a currency strategist at Commerzbank AG in London. “At the same time you’ve got better growth and lower inflation, so the pound is going to benefit from disinflationary growth.”

Gilts handed investors a loss of 4 percent this year through Dec. 5, according to Bloomberg World Bond Indexes. German securities fell 1.9 percent and U.S. Treasuries declined 2.8 percent.

Industrial Production

The pound lost 1 percent to 83.86 pence per euro, the steepest decline since Oct. 4. It reached 82.53 pence on Dec. 2, the strongest since Jan. 11. Sterling fell 0.3 percent to $1.6324.

Industrial production expanded at a slower pace in October, according to a Bloomberg survey of analysts before the data is released on Dec. 10. BOE Governor Mark Carney will speak the day before at The Economic Club of New York. The nation is due to sell 4.5 billion pounds of bonds due in 2019 on Dec. 12 as well as 1 billion pounds of inflation-linked securities on Dec. 10.

The U.K. currency has strengthened 5.5 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.1 percent and the dollar gained 0.3 percent.

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