U.K. Bonds Rise With Investors Skeptical on Global-Growth Pickupby
Pound drops Monday to weakest level since 2009 versus dollar
Investors underwhelmed by G-20 statements on global economy
U.K. sovereign bonds gained, pushed by renewed investor skepticism that governments and central banks will succeed in spurring the global economy.
Ten-year yields dropped for the first time in three days, extending gilts’ positive return for February, as investors were left underwhelmed when Group-of-20 finance ministers offered only vague commitments to spur growth after a weekend summit. As the debate over Britain’s membership of the European Union heats up before a June referendum, the nation’s debt is holding up better than its currency, which slid to the weakest level in almost seven years versus the dollar on Monday.
Gilts returned 0.6 percent this month through Feb. 26, after earning 3.9 percent in January, according to Bloomberg World Bond Indexes. January’s gains came even as foreign investors sold a net 6.3 billion pounds ($8.8 billion) of the securities, the biggest one-month drop in almost two years.
“I’m not overly bearish on gilts as a result of the referendum,” said Jason Simpson, a strategist at Societe Generale SA in London. A “Brexit” scenario “would significantly dampen policy expectations and should help certainly the first 10 years of the curve. If you look at the wider picture, gilts -- if you are a euro investor -- still offer a handsome yield pickup.”
The 10-year gilt yield dropped seven basis points, or 0.07 percentage point, to 1.33 percent at 4:09 p.m. London time. The 2 percent security due in September 2025 rose 0.64, or 6.40 pounds per 1,000-pound face amount, to 105.98. The yield touched 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989.
Gilts have outperformed developed-market peers in 2016, supported by investors pushing back wagers on an interest-rate increase by the Bank of England, citing the risk that the U.K.’s growth prospects will be harmed by turmoil in the global economy.
With data on Monday showing a drop in euro-area consumer prices this month strengthening the case for the European Central Bank to increase stimulus next month, investors are drawn to U.K. debt, which yields about 1.25 percentage point more than German bunds over 10 years.
Britain’s currency, which has borne the brunt of investor concern over the potential exit from the EU, rose 0.4 percent on Monday to $1.3932, paring a fourth monthly drop. Sterling fell to $1.3836 earlier, the lowest since March 2009.
The level of gilts sold by foreign investors in January may have been distorted by a redemption of 32.5 billion pounds on Jan. 22, according to SocGen’s Simpson.