U.K. Bond Gains Push Spread to Treasuries to Widest in a Decade

  • 10-yr gilts rise most in month as investors seek safer assets
  • Carney says BOE won't tell people how to vote in EU referendum

U.K. government bonds rose the most in a month as a bigger-than-forecast decline in Chinese exports and a slide in stocks from Asia to Europe stoked demand for relatively safe assets.

The data underpinned the argument for the Bank of England to keep interest rates at a record low for longer, which has pushed the extra yield that 10-year Treasuries offer over gilts to the widest in almost a decade. BOE Governor Mark Carney said in testimony to lawmakers that the central bank won’t try to tell people how to vote in the referendum on Britain’s European Union membership.

“We’re seeing a bit of a bid to fixed income on the back of equity weakness,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “You can make the case that the U.K. leaving the EU would be supportive to gilts in a flight-to-quality demand for core fixed income. On the other hand there are risks” that foreign buyers would “take a step to the sidelines,” he said.

The benchmark 10-year gilt yield fell nine basis points, or 0.09 percentage point, to 1.39 percent as of 11:38 a.m. London time. That’s the biggest drop since Feb. 11. The 2 percent security due in September 2025 rose 0.845, or 8.45 pounds per 1,000-pound ($1,421) face amount, to 105.435.

Record Low

The yield touched 1.226 percent on Feb. 11, the lowest since Bloomberg began collecting the data in 1989. The spread with 10-year U.S. Treasuries widened to 46 basis points, the most based on end-of-day prices since July 2006.

Gilts were also supported by a British Retail Consortium report overnight, which showed shop sales almost stalled in February compared with a year earlier, after a 2.6 percent advance in January.

The U.K. sold 1.25 billion pounds of bonds due July 2052 at an average yield of 2.219 percent.

The pound fell 0.4 percent to $1.4212, ending six days of gains. The U.K. currency has borne the brunt of investor unease about the possibility of a “Brexit” this year, with its 3.5 percent slide being the second-worst performance among 16 major peers.

The prospect of Britain leaving the world’s largest single market has increased sterling volatility, Carney told Parliament. A big drop in the pound would be a challenge for the BOE, he said.

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