U.K. Gilts Rise Most in 2 Months on Crimea Tension; Pound DropsDavid Goodman
U.K. government bonds climbed the most in two months this week as investors sought the relative safety of British debt amid simmering tension in Ukraine’s southern Crimea region.
Yields on Britain’s 10-year gilt tumbled with those on German bonds and Treasuries as Crimea prepares for a referendum tomorrow on splitting from Ukraine after Russia seized control of the Black Sea peninsula. The pound recorded consecutive weekly losses against the dollar and the euro. Bank of England Governor Mark Carney said the institution will not sell all of the 375 billion pounds ($622 billion) of gilts it bought under its asset-purchase plan.
“Gilts have benefited from the general bid for core bonds,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “With things as they are in the Crimea, it’s very difficult to have a clean view of the domestic side of things.”
The U.K. 10-year yield dropped 13 basis points, or 0.13 percentage point, this week to 2.66 percent at 4:58 p.m London time yesterday, the biggest drop since the five days through Jan. 10. The 2.25 percent gilt maturing in September 2023 climbed 1.07, or 10.70 pounds per 1,000-pound face amount, to 96.56.
Gilts returned 2.7 percent this year through March 13, according to Bloomberg World Bond Indexes as investors sought the safest assets amid the flare-up in Ukraine, an emerging-markets rout and concern Chinese growth is slowing. Treasuries gained 2.1 percent and German securities earned 2.6 percent.
U.K. bonds lost 4.3 percent in 2013, the worst-performing major-market sovereign bonds in the Bloomberg indexes, as improving economic data prompted speculation the Bank of England would raise interest rates sooner than it anticipated, damping demand for fixed-income assets.
Carney said in March 11 testimony to the U.K. Parliament’s Treasury Committee that any gilt sales would only begin after interest rates have been raised “several” times. He also indicated he agreed with comments by Deputy Governor Charlie Bean this week that the key rate may settle at about 2 percent to 3 percent once tightening begins.
Bean said yesterday the BOE may unwind the program by holding the gilts to maturity.
The U.K. sold 3 billion pounds of new securities due in 2024 this week, while the Bank of England reinvested 4.05 billion pounds of funds related to their asset-purchase program. The cash flow is associated with a gilt that matured on March 7.
The pound dropped 0.5 percent this week to $1.6622. Sterling declined 0.8 percent to 83.70 pence per euro after depreciating to 83.81 pence, the weakest level since Dec. 27.
The U.K. currency has climbed 11 percent in the past year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro advanced 7.1 percent, while the dollar weakened 0.6 percent.
Chancellor of the Exchequer George Osborne is due to announce his latest budget to Parliament on March 19, while a report the same day is forecast by economists to show the U.K.’s unemployment rate held at 7.2 percent in the three months through January.