U.K. Bonds Drop After Retail Sales, Wage Growth Beat Estimates

U.K. government bonds declined this week, with 10-year gilt yields rising from the lowest since May 2013, amid speculation the securities are too expensive given the improving outlook for Britain’s economy.

The pound strengthened the most in more than three months against the euro as reports showed wage growth is accelerating in Britain and retail sales exceeded economist forecasts. The better-than-expected data was enough to push gilts lower even as the U.K.’s inflation rate dropped to the least in more than a decade last month.

“At some point we will get a normalization towards more reasonable levels,” said Alan Clarke, an economist at Scotiabank in London. For 10-year gilts, “anything sub-2 percent is extraordinarily low,” he said.

Benchmark 10-year yields increased five basis points, or 0.05 percentage point, this week to 1.85 percent at 5 p.m. London time yesterday. The 2.75 percent gilt due in September 2024 fell 0.475, or 4.75 pounds per 1,000-pound ($1,561) face amount, to 107.965.

Retail sales, including auto fuel, increased 1.6 percent in November, the most this year, the Office for National Statistics said on Dec. 18. Economists forecast a 0.4 percent gain, according to the median estimate in a Bloomberg News survey. Wages rose 1.4 percent in the three months through October compared with a year earlier, up from 1 percent higher in the third quarter, separate data showed Dec. 17.

Surprise Index

Citigroup’s Inc. Economic Surprise Index for the U.K., which measures whether data are above or below analyst estimates, was at minus 11.3 yesterday, the highest since October and up from as low as minus 43.70 in November. That helped push Britain’s 10-year yield up from a more than 19-month low of 1.69 percent on Dec. 16, reached after a report showed the annual rate of consumer-price growth declined to 1 percent last month, the slowest since 2002.

The pound appreciated 1.1 percent to 78.39 pence per euro this week, the biggest gain since the period ended Sept. 19. Sterling fell 0.7 percent to $1.5609.

A report next week will confirm the U.K. economy expanded 0.7 percent in the third quarter, according to the median estimate of economists in a Bloomberg survey. The gilt market will close early on Dec. 24 and re-open on Dec. 29.

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