U.K. Gilts Advance as Global-Growth Concern Boosts Haven Assets

U.K. government bonds rose, with 10-year yields falling the most in six weeks, as a bigger-than-estimated contraction in the U.S. economy and political instability in Iraq boosted demand for haven assets.

Ten-year gilts advanced with Treasuries and German bunds as a June 25 report showed the U.S. economy shrank in the first quarter by the most since 2009. Demand for the safest assets was also supported as Iraq Prime Minister Nouri al-Maliki struggled to contain a rebellion that’s threatening to split the nation. Bank of England Governor Mark Carney cooled speculation of an imminent interest-rate increase this week by saying wages weren’t rising as quickly as the central bank anticipated.

“The U.S. data has been mixed again and that seems to be supporting the Treasury market,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “The developments in Iraq seem to be creating a bit of a risk off. For the U.K., there might also be home-cooked developments. Carney sounded slightly soft when he discussed the pace of wages, and that was seen as maybe reducing slightly the fears of a quick hike.”

Benchmark 10-year gilt yields fell 12 basis points, or 0.12 percentage point, this week to 2.64 percent at 5 p.m. London time yesterday, the biggest decline since the period ended May 16. The 2.25 percent bond due in September 2023 climbed 0.96, or 9.60 pounds per 1,000-pound ($1,702) face amount, to 96.835.

Yields Slide

Treasury 10-year note yields decreased eight basis points to 2.53 percent. The rate on German 10-year bunds declined eight basis points to 1.26 percent, the biggest weekly drop since the period through May 16.

“Developments on the wage front suggest to me that there has been more spare capacity in the labor market than we had thought,” Carney told lawmakers on Parliament’s Treasury Committee on June 24. The exact timing of any increase in the BOE’s key rate “will be driven by the data,” he said. Yesterday, he told BBC Radio 4 that rates may rise this year or next year, with the economic recovery having “proceeded even better than we had expected.”

The BOE’s Monetary Policy Committee held its key interest rate at a record-low 0.5 percent on June 5, where it’s been since March 2009. Officials are scheduled to next announce policy on July 10.

The pound was little changed this week at $1.7016, still set for the longest stretch of quarterly gains versus the dollar since 2007. Sterling jumped 2.1 percent since the end of March.

The Debt Management Office is scheduled to auction 4 billion pounds of five-year gilts on July 1.

Gilts returned 3.8 percent this year through June 26, Bloomberg World Bond Indexes show. That compares with a 4.8 percent gain for German securities and 3.2 percent for Treasuries.

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