U.K. Two-Year Yields Climb to Six-Month High on Economy Optimism

U.K. two-year government bond yields climbed to the highest in six months amid speculation an improving economy will prompt the Bank of England to raise interest rates earlier than the institution forecasts.

The rate on 10-year gilts approached 3 percent, a level last reached in September. U.K. securities are the worst performing major sovereign-bond market this year, according to data compiled by Bloomberg. The pound climbed against the euro after a report from the British Bankers’ Association showed U.K. mortgage approvals increased to the highest since 2009 in November. The gilt market closes at about 12.30 p.m. London time today and will remain shut until Dec. 27.

“The recent jump in shorter-dated yields has probably been exaggerated by the severe lack of liquidity typical at this time of the year, but is generally a reflection of the significant improvement in economic data and expectations over the past few months,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “We believe the recovery will stay on track over the coming year, and that yields therefore should gradually continue to rise.”

U.K. two-year gilt yields climbed two basis points, or 0.02 percentage point, to 0.59 percent at 12:09 p.m. London time, after rising to 0.60 percent, the highest since June 24. The 4.75 percent security due in September 2015 fell 0.075, or 75 pence per 1,000-pound ($1,637) face amount, to 107. The 10-year yield increased two basis points to 2.98 percent.

Forward Guidance

Under guidance introduced by new governor Mark Carney in August, Bank of England policy makers pledged to keep interest rates low until the jobless rate falls to 7 percent, subject to caveats on financial stability and inflation.

While the central bank forecast in November the threshold wouldn’t be reached until the third quarter of 2015, the rate dropped to 7.4 percent in the three months through October, the lowest in 4 1/2 years.

Bank of England Deputy Governor Andrew Bailey said yesterday the central bank may take steps to prevent house prices from rising too quickly.

The 10-year gilt yield has risen from this year’s low of 1.61 percent on May 2 as the U.K. economy has gathered pace. Gilts have lost 4.2 percent this year through yesterday, the worst performer among major sovereign bond markets tracked by the Bloomberg World Bond Indexes. German securities fell 1.9 percent and U.S. Treasuries declined 3 percent.

Mortgage Approvals

The number of loans approved for home purchases climbed to 45,044, the highest since December 2009, from a revised 43,315 in October, the London-based BBA said today. The median estimate in a Bloomberg News survey of analysts was for an increase to 44,400. British house prices may rise as much as 8 percent next year, Halifax, the mortgage unit of Lloyds Banking Group Plc, said yesterday.

The pound traded at $1.6371 after climbing to $1.6484 on Dec. 18, the highest since August 2011. The U.K. currency climbed 0.2 percent to 83.61 pence per euro.

Sterling has gained 4.8 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 2.9 percent, while the dollar fell 1.7 percent.

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