U.K. two-year gilts rose for a second day as the Debt Management Office said it will sell 15 billion pounds ($24.2 billion) fewer bills this fiscal year than earlier forecast and cut gilt auctions by 200 million pounds.
Ten-year bonds advanced after Chancellor of the Exchequer George Osborne revised down the government’s economic growth forecasts and said the budget deficit will take longer to tame than originally planned. The pound earlier dropped to a six-week low versus the euro as a report showed Britain’s services expanded at the slowest pace in almost two years. Gilt sales will be decreased by reducing the mini-tender program to 6.3 billion pounds. Twenty- and 30-year bonds declined.
“The cuts would have helped the two-year price go up,” said Jason Simpson, an interest-rates strategist at Banco Santander SA (SAN) in London. “All the mini-tenders have been in the short-end of the curve this year. The easiest shock absorber is to run down bills.”
The two-year gilt yield fell two basis points, or 0.02 percentage point, to 0.30 percent at 5 p.m. London time. The 5 percent gilt due in September 2014 rose 0.01, or 10 pence per 1,000-pound face amount, to 108.2.
The yield on the 10-year gilt was three basis points lower at 1.78 percent after rising seven basis points, the most since Nov. 20. U.K. 30-year gilts declined as the chancellor announced plans to allow companies to reduce their pension deficit.
“Anything that increases the discount rate reduces the deficit measure and reduces urgency to buy long-dated fixed income,” said Sam Hill, an interest-rate strategist at Royal Bank of Canada in London.
U.K. 30-year yields rose seven basis points to 3.13 percent, after climbing as much as 10 basis points, the steepest increase since Sept. 14.
The yield on the U.K. inflation-linked security maturing in March 2062 rose 10 basis points to 0.23 percent, the highest since Nov. 12, based on closing prices.
The pound was 0.1 percent stronger at 81.26 pence per euro after depreciating to 81.48 pence, the weakest level since Oct. 24. Sterling was little changed at $1.6102. It rose to $1.6131 yesterday, the strongest since Nov. 2.
Sterling has gained 1.2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 1.7 percent and the dollar fell 2.7 percent.
Forecasts from the Office for Budget Responsibility show the economy will shrink 0.1 percent this year instead of the 0.8 percent growth predicted in March, and expand 1.2 percent next year instead of 2 percent, Osborne told lawmakers. He extended his austerity program by one year to 2018 and said he will miss by a year his target to start cutting debt as a percentage of gross domestic product in 2015.
The DMO plans to end the fiscal year with a stock of 53.5 billion pounds of bills outstanding. The agency projected in April the stock would be 68.5 billion pounds.
A gauge based on a survey of purchasing managers in the services industry was 50.2 last month from 50.6 in October, Markit Economics and the Chartered Institute of Purchasing and Supply said. That’s the lowest outcome since December 2010. A reading above 50 indicates expansion.
Bank of England policy makers will tomorrow maintain their asset-purchase target at 375 billion pounds, according to all 36 economists in a Bloomberg News survey.
Gilts returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.7 percent and U.S. Treasuries earned 2.8 percent.
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