U.K. Bond Rally on Iraq Pushes 10-Year Yield to Lowest in Year

U.K. government bonds advanced, pushing the 10-year yield to the lowest in a year, as investors sought the safest assets after U.S. President Barack Obama authorized limited air strikes against militants in Iraq.

Yields on 10-year gilts fell for a fifth week, the longest run of declines since January, as the rate on similar-maturity Treasuries fell to the least since June 2013. The pound tumbled to the lowest in eight weeks against the dollar. American warplanes struck against militants from Islamic State in Iraq, pulling the U.S. back into a conflict three years after its last combat troops left.

“There’s geopolitical risks in Iraq and elsewhere,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “People have been short, I suspect both in gilts and Treasuries, so there’s short covering, which has magnified the moves.” Short covering is when investors end bets an asset will decline.

Benchmark 10-year gilt yields fell two basis points, or 0.02 percentage point, to 2.46 percent at 5:02 p.m. London time after touching 2.40 percent, the lowest since Aug. 5, 2013. The 2.25 percent bond due in September 2023 rose 0.175, or 1.75 pounds per 1,000-pound ($1,681) face amount, to 98.30.

The U.S. 10-year yield fell as much as six basis points to 2.35 percent.

Best Performer

The pound dropped 0.4 percent to $1.6774 after touching $1.6767, the lowest since June 11. The U.K. currency depreciated 0.7 percent to 79.95 pence per euro.

Sterling has weakened 0.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. In the past year, it was the best performer, gaining 9.4 percent as investors brought forward bets on the timing of the Bank of England’s first increase in interest rates since 2007.

Central-bank officials maintained their key interest rate at a record-low 0.5 percent yesterday and kept their asset-purchase target at 375 billion pounds. The BOE will update its economic forecasts next week.

Morgan Stanley recommends selling gilts, betting that policy makers will present a “hawkish to neutral” tone in the central bank’s inflation report due on Aug. 13, O’Brien said.

Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting U.K. borrowing costs will increase by 25 basis points by March.

The Debt Management Office sold 3.5 billion pounds of bills today.

Gilts returned 6 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 3.9 percent and German securities gained 6.2 percent.

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