U.K. Government Bonds Fall as Yuan Stabilizes, Home Prices Climb

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U.K. government bonds fell after China’s central bank eased concern that a disorderly devaluation of yuan may happen, helping set off a rally in stocks and damping demand for the safest assets.

The pound halted a two-day decline against the euro after a report on Thursday showed U.K. house prices climbed to the highest in a year. In the past two days, the euro had climbed versus most major currencies, including sterling, as investors spooked by China’s surprise devaluation unwound so-called carry trades in which they used the common currency to fund higher-yielding assets.

“There seems to be less panic in the market,” said Peter Rosenstreich, chief market strategist at Swissquote Bank SA. “With China standing ready to support the yuan, the market can refocus on fundamentals and policy divergence. The strong U.K. house-price data is part of that picture.”

The benchmark 10-year gilt yield rose five basis points, or 0.05 percentage point, to 1.84 percent as of the 5 p.m. close in London. It fell 12 basis points in the previous two days. The 5 percent bond due in March 2025 dropped 0.47, or 4.70 pounds per 1,000-pound ($1,560) face amount, to 127.6. Two-year gilts were little changed, yielding 0.56 percent.

The Royal Institution of Chartered Surveyors said on Thursday that its gauge for U.K. house prices rose to a one-year high of 44 in July from 40. An index of price expectations in London over the next three months rose to 48, the highest since March last year. A similar gauge for the U.K. held at 41.

In China, central bank Assistant Governor Zhang Xiaohui said on Thursday that the yuan’s adjustment after the fixed method was changed is “basically already completed,” easing concern of further moves to push the yuan lower. Verbal support from the central bank helped to stem the currency’s worst loss in two decades.

The yuan fell 0.2 percent versus the dollar, after tumbling 2.8 percent in the previous two days.

Rate Outlook

China’s currency devaluation fueled speculation that it may spark a new round of competitive monetary easing and may prove to be deflationary for many economies.

For Royal Bank of Canada, data such as the house prices on Thursday and the prospect of higher interest rates in the U.S. means U.K. bond yields are likely to climb from here. The bank, one of 21 primary dealers of gilts, forecasts the 10-year yield will rise to 2.50 percent by the end of this year. That compares with a median forecast of 2.20 percent in a Bloomberg survey of analysts.

“Yields are going up as the Federal Reserve is getting close to a hike,” said Peter Schaffrik, head of European rates strategy at the bank. “If we do get the bank moving interest rates, eventually gilts will start underperforming, particularly in European markets.”

The pound was little changed at 71.45 pence per euro, having appreciated by as much as 0.7 percent earlier. Sterling dropped 0.1 percent to $1.5597.