U.K. Bonds Post Weekly Decline as Domestic Economy Beats ECB

  • Gilts drop with Treasuries on Friday after China cut rates
  • U.K grew 0.6 percent in third quarter, economists forecast

U.K. government bonds posted a weekly decline as signs the nation’s economy is gathering momentum outweighed the dovish sentiment from the European Central Bank that boosted fixed income globally.

A report Thursday showed U.K. retail sales increased the most in almost two years last month, preventing the gilt market from rallying as much as its European peers when ECB President Mario Draghi hinted that he may increase stimulus to the euro area by the end of the year. Gilts dropped Friday, along with U.S. Treasuries, after China’s central bank cut its benchmark lending rate, adding to speculation that stimulus from the Asian economy will ease global market turmoil and pave the way for the Federal Reserve and Bank of England to raise rates.

Bank of England officials next meet on Nov. 5 when they will also unveil forecasts from the central bank on growth and inflation. Policy makers have been debating whether the U.K. economy is strong enough to withstand interest-rate increases or if weakness in global growth will make it too vulnerable. Only one Monetary Policy member has recently voted to increase rates.

“We had very strong retail sales in the U.K. yesterday so had it not been for dovish ECB you probably would have seen a meaningful selloff,” said John Wraith, the head of U.K. rates strategy at UBS Group AG in London. “That’s a good illustration of the dilemma the Bank of England have to deal with: do we just concentrate on the domestic factors which are all suggesting that before long you should be fairly safe raising rates from such a low level or do we put a wary eye on what’s going on in Europe and the Far East?”

The yield on 10-year gilts rose six basis points, or 0.06 percentage point, to 1.86 percent as of the 5 p.m. London close on Friday. The 2 percent security due in September 2025 fell 0.56, or 5.60 pounds per 1,000-pound ($1,535) face amount, to 101.25. That left the yield six basis points higher this week.

The yield on similar-maturity German bunds has fallen four basis points this week, while that on similar-maturity Treasuries has climbed four basis points.

U.K. sales, including auto fuel, rose 1.9 percent from August, the Office for National Statistics said. That was more than the 0.4 percent gain economists had forecast in a Bloomberg survey. Next week, data will show the economy grew 0.6 percent in the third quarter, from 0.7 percent in the three months through July, analysts forecast in a Bloomberg survey.

The pound rose 0.5 percent to 71.78 pence per euro on Friday, and earlier touched 71.69 pence, the strongest since August. The U.K. currency has jumped 2.4 percent this week, the biggest jump since July.

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