U.K. Bonds Hold Stock-Driven Gains as 2025 Securities Auctioned

  • DMO sells sovereign bonds at lower yield than November auction
  • Gilt yields fell most since mid-December Monday on haven bid

U.K. government bonds maintained Monday’s advance after the nation auctioned 3 billion pounds ($4.4 billion) of the securities maturing in 2025.

The nation’s 10-year bonds held gains from the previous day, when they jumped the most since mid-December, as a slump in global stocks boosted demand for safer assets. The U.K.’s Debt Management Office sold the gilts at a yield of 1.879 percent, lower than the 1.938 percent yield at its last auction on Nov. 18. The bid-to-cover ratio -- a gauge of demand relative to the amounts allotted -- was 1.62, higher than 1.49 in the previous offer.

“It was reasonably strong as auctions go,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. Sales of 10-year bonds “often go pretty well because they are the easiest for markets to cope with in risk terms” and particularly so after the turmoil in China created “demand for safe havens” such as gilts.

Ten-year gilt yields were little changed at 1.87 percent as of 5 p.m. in London. They fell eight basis points on Monday, the most since Dec. 17. The price of the 2 percent security due September 2025 was at 101.11 percent of face value.

Falling Yields

Investor doubts that the Bank of England will increase interest rates in 2016 have pushed down 10-year gilt yields from as high as 2.21 percent in June last year. A stock-market rout in China on Monday, subdued commodity prices and an uneven U.K. economic recovery are fueling deflationary pressures that benefit bonds.

Data released on Monday showed that while mortgage lending rose in the U.K., manufacturing growth unexpectedly slowed. This is making it harder for the BOE to justify tighter monetary policy.

Forward contracts based on the sterling overnight index average, or Sonia, aren’t fully pricing in a 25-basis-point increase to interest rates until 2017.

The pound fell 0.4 percent to $1.4658, and earlier touched $1.4638, the lowest level since April. It strengthened 0.5 percent to 73.26 pence per euro.

“It’s not clear that the domestic economy is where you want it to be for a rate hike anytime soon,” David Stubbs, a London-based global market strategist at JPMorgan Asset Management, said in an interview on Bloomberg Television’s “Surveillance” with Francine Lacqua and Tom Keene. “It is going to take rapid, sustained inflation pressures domestically to get the BOE to move.”

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