BLBG:Gilts Extend Longest Run of Gains in Two Months; Pound Weakens
U.K. government bonds rose for a third day, poised for their longest run of gains in two months, amid speculation the Federal Reserve and other central banks will maintain monetary stimulus to keep borrowing costs low.
Benchmark 10-year gilts pared a weekly decline as a measure of U.K. inflation expectations approached the lowest since January. The pound weakened for the first time in five days against the dollar, dropping from a four-month high reached yesterday, after the Office for National Statistics said construction volume fell 6.5 percent in April from a month earlier.
“There hasn’t been much domestic news, so the moves in gilts have largely been driven by U.S. Treasuries,” said Henry Skeoch, an inflation-linked strategist at Barclays Plc in London. “The cheapening in 10-year U.K. break-evens reflects the fall in headline inflation globally. Real yields have risen by more than nominal yields, reflecting selling pressures, pushing break-evens narrower.”
The yield on the 10-year gilt fell four basis points, or 0.04 percentage point, to 2.08 percent at 11:04 a.m. London time. The 1.75 percent security due September 2022 rose 0.34, or 3.40 pounds per 1,000-pound face amount, to 97.23. The three-day gain is the longest streak since the period ended April 15.
U.S. Treasuries rose for a second day on waning concern that the Fed is about to scale back its program of asset buying. Fed Chairman Ben S. Bernanke has said repeatedly a reduction in purchases wouldn’t mean an end to record easing. Policy makers next meet on June 18-19.
Break-Even Rate
The U.K. 10-year break-even rate, derived from the difference in yield between gilts and index-linked securities, held yesterday’s decline at 2.90 percentage points after declining to 2.897 percentage points on June 11, the least since Jan. 10.
Gilts handed investors a loss of 1.7 percent this year through yesterday, according to the Bloomberg U.K. Sovereign Bond Index. (BRIT) German bonds dropped 0.9 percent and U.S. Treasuries declined 1.1 percent, separate Bloomberg indexes show.
The pound dropped 0.7 percent to $1.5618 after climbing to $1.5738 yesterday, the highest level since Feb. 11. The U.K. currency has still strengthened 0.4 percent this week. Sterling weakened 0.2 percent to 85.27 pence per euro.
“Cable just got a bit too toppy above $1.57 so we are seeing a bit of a reversal today,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London, referring to the pound-dollar exchange rate. “The pound has been a beneficiary of broad dollar weakness.”
The U.K. currency has gained 3.6 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro appreciated 2.3 percent and the dollar fell 0.3 percent.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
