Gilts Beating German Bonds Reflects Darker U.K. Economic Outlook

  • U.K. bonds trail bunds lower after ECB deposit-rate reduction
  • Sterling rallies from weakest level since April versus dollar

U.K. government bonds outperformed their German counterparts as Britain’s economic prospects increasingly look gloomy and the European Central Bank boosted stimulus less than investors expected.

The extra yield, or spread, that investors get for holding 10-year gilts instead of similar-maturity German bunds fell to the least in seven weeks.

The European Central Bank reduced its deposit rate deeper below zero and extended the its quantitative-easing program by six months, without adding to monthly purchases. Bonds across the euro area slipped, with gilts following suit, as the ECB’s new deposit rate had been fully priced in money markets, with some banks predicting an even bigger cut.

The pound rallied from a seven-month low against the dollar. That partly reflected the euro’s jump versus the greenback after the ECB meeting. Earlier, the U.K. currency was little changed, even as a services gauge rose in November by more than economists forecast. Reports earlier this week showed manufacturing and construction grew at slower paces than economists predicted, pushing the U.K. currency lower.

“The data until this morning has been a bit soft recently, so I guess some people have been paring back their expectations,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “We need to see inflation turn the corner and start to pick up, which we do expect to see over the next few months” in the U.K.

Bund Yield

The benchmark 10-year gilt yield increased 13 basis points, or 0.13 percentage point, to 1.88 percent as of 3:40 p.m. London time, having declined to 1.72 percent on Wednesday, the lowest since Oct. 5. The 2 percent bond due September 2025 fell 1.195, or 11.95 pounds per 1,000-pound ($1,503) face amount, to 101.015.

Thirty-year gilt yields jumped 12 basis points to 2.58 percent, having touched 2.44 percent Wednesday, the lowest since Oct. 5.

“The selloff in bunds has dragged gilts down, but gilts are clearly outperforming bunds,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “It filtered through to both gilts and Treasuries as well. Bunds were the main casualty.”

The yield spread between 10-year gilts and similar-maturity bunds was at 122 basis points, the smallest gap since Oct. 15, based on closing prices. Germany’s yield rose 20 basis points to 0.67 percent.

The pound gained 1 percent to $1.5103, after being at $1.4895 on Wednesday, the lowest since April 21. It weakened 1.8 percent to 72.28 pence per euro.

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