U.K. Bonds Rise for Third Day as Investors Weigh Growth Outlook

U.K. 10-year government bonds rose for a third day, and the pound was little changed versus the dollar and euro, as investors weighed whether the U.K. economy will maintain its recovery in 2014.

Benchmark U.K. 10-year gilt yields dropped to the lowest level in more than two weeks amid speculation the increase of 25 basis points in December was excessive. The pound strengthened in earlier trading after the British Chambers of Commerce said a survey of manufacturers and services companies showed the economy will probably strengthen further in the short term. The U.K. Debt Management Office sold 1.35 billion pounds ($2.21 billion) of inflation-linked securities.

“Gilts are trading quite well,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “A large part of this is as a correction to some of the excessive moves we saw in December. People need to be careful about getting carried away on the U.K. economy.”

The U.K. 10-year yield dropped two basis points, or 0.02 percentage point, to 2.95 percent at 4:32 p.m. London time after declining to 2.94 percent, the lowest level since Dec. 20. The 2.25 percent bond maturing in September 2023 rose 0.155, or 1.55 pounds per 1,000-pound face amount, to 94.125.

Bank of England officials will keep their key interest rate at a record-low 0.5 percent when they announce their next policy decision on Thursday. They have pledged to keep borrowing costs low until the unemployment rate, currently at 7.4 percent, falls below 7 percent.

‘Probably Strengthen’

Economic growth “will continue and probably strengthen in the near-term,” the British Chambers of Commerce said in a summary of its quarterly survey published today.

“The upward momentum in the U.K. economy will continue into this year and growth will be robust,” said Lee Hardman, a currency strategist at Bank of Tokyo Mitsubishi-UFJ Ltd. in London. “Versus the dollar, the good news about the economy seems to be more discounted.” A long position is a bet an asset will rise.

The pound rose 0.1 percent to $1.6416 after climbing as much as 0.2 percent. It appreciated to $1.6603 on Jan. 2, the strongest since August 2011. Sterling appreciated 0.1 percent to 82.95 pence per euro.

The pound strengthened 7.4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, amid speculation a growing economy will prompt the Bank of England to increase borrowing costs. The euro appreciated 3 percent, while the dollar fell 3.6 percent.

Demand increased at today’s sale of inflation-linked bonds due in March 2029. Investors bid for 2.12 times the amount allotted, up from 1.8 times at a previous auction in July. The real yield rose to 0.17 percent from minus 0.043 percent.

U.K. gilts handed investors a loss of 1.7 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes. German securities fell 0.5 percent and Treasuries declined 2.5 percent.

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