May 28 (Bloomberg) -- U.K. 10-year gilts advanced and the pound declined versus the euro as consumer confidence unexpectedly fell this month, fueling concern the economic recovery may be faltering.
The 10-year yield snapped a two-day gain after GfK NOP said its consumer confidence sentiment index for May slid to minus 18, a five-month low, from minus 16 in April. Economists had predicted the index would be unchanged, according to the median of 15 estimates in a Bloomberg survey.
“Gilts are firmer after the consumer confidence data,” said John Wraith, a U.K. fixed-income strategist at Bank of America Merrill Lynch in London. “There’s concern over slowing momentum in the economic recovery, and we’re being driven by risk aversion and flight-to-quality flows.”
The 10-year gilt yield declined three basis points to 3.59 percent as of 1:12 p.m. in London. The 4.75 percent security due March 2020 gained 0.25, or 2.5 pounds per 1,000-pound ($1,457) face amount, to 109.45. The two-year note yield was little changed at 0.90 percent.
Ten-year bonds are set for their biggest monthly gain since March 2009 after the deepening European debt crisis prompted investors to see the safest government securities. Gilts have been boosted by pledges from the new government led by Prime Minister David Cameron to reduce the budget deficit, the biggest among Group of Seven nations. The 10-year yield declined 32 basis points in May.
The pound was little changed at $1.4576 after dropping to $1.4492 earlier. The U.K. currency declined to $1.4231 on May 20, its lowest level since March 30, 2009. It weakened 0.3 percent to 85 pence per euro.
Budget Deficit
Concern the U.K. would struggle to reduce its deficit has sent the pound 3.5 percent lower this year, according to Bloomberg Correlation-Weighted Indexes. Chancellor of the Exchequer George Osborne outlined 6.25 billion pounds of spending cuts on May 24. He will set out broader reductions in an emergency budget on June 22.
The U.K. currency may weaken as the government cuts spending and the Bank of England maintains low interest rates for an extended period, according to Lee Hardman, a foreign- exchange strategist at Bank of Tokyo Mitsubishi UFJ Ltd. in London.
“Fundamental data still support a weaker pound, with not only more aggressive fiscal tightening, but also a looser monetary policy for longer,” Hardman said in a telephone interview today.
Interest Rates
Bank of England policy makers, led by Governor Mervyn King, voted unanimously at their May 10 meeting to keep the key interest rate at a record low 0.5 percent.
The Debt Management Office, which handles bond sales on behalf of the U.K. Treasury, plans to sell 4.25 billion pounds of a 2.75 percent gilt due 2015 on June 2, and 2 billion pounds of a 4.5 percent security maturing in 2034 a day later.
Britain plans to issue 185.2 billion pounds of gilts this fiscal year, after selling 227.6 billion pounds of the securities in the previous 12 months.
Gilts have returned 4.3 percent this year, compared with gains of 6.2 percent for German bonds and 3.6 percent for U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch.
To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net
