U.K. Yields Approach Lowest This Month Before Osborne Speech

  • Primary dealers expect T-bills to plug cash requirement
  • Pound falls toward lowest level in two weeks versus dollar

U.K. 10-year bond yields approached their lowest level this month before Chancellor of the Exchequer George Osborne’s Spending Review, with investors weighing the implications for gilt issuance from a possible increase in the government’s cash needs.

The pound dropped for a fourth day against the dollar, having slipped on Tuesday to a two-week low. Osborne’s statement comes amid weaker revenue and stronger spending than officials predicted in July. U.K. securities have been supported by speculation that the economy’s loss of momentum will prompt the Bank of England to delay raising interest rates.

The Debt Management Office will make up a funding shortfall of as much as 9 billion pounds ($13.6 billion) in the current fiscal year by increasing sales of Treasury Bills, according to primary dealers including Lloyds Banking Group Plc, Nomura International Plc, Royal Bank of Canada, Royal Bank of Scotland Group Plc and Societe Generale SA. They forecast gilt issuance to stay at 127.4 billion pounds.

“Most people seem to be expecting the stock of T-bills to act as a buffer rather than an increase in gilt issuance,” said Joakim Tiberg, a fixed-income strategist at UBS Group AG in London. “Even if gilt issuance were to be revised up slightly, it wouldn’t be a big deal for the market because we are talking relatively small amounts” which would be easily absorbed, he said.

Benchmark 10-year gilt yields fell less than one basis point, or 0.01 percentage point, to 1.87 percent as of 10:50 a.m. London time, having dropped to 1.83 percent on Tuesday, the lowest since Oct. 28. The price of the 2 percent bond due in September 2025 was at 101.195 percent of face value. U.K. sovereign bonds have earned 0.5 percent in the past month compared with a 0.9 percent loss for Treasuries, according to Bloomberg World Bond Indexes.

The pound was at $1.5069, having touched $1.5054 on Tuesday, the lowest since Nov. 9. Sterling strengthened 0.4 percent to 70.31 pence per euro. It has retreated from 69.83 pence on Nov. 18, the strongest level since Aug. 6.

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