Bloomberg News

Gilt Yields Climb to Four-Month High as Demand Falls at Auction

June 11, 2013

U.K. government bonds fell for a fourth day, pushing 10-year yields to the highest level in almost four months, as demand dropped at a 3.75 billion-pound ($5.84 billion) sale of new benchmark securities.

Two-year gilt yields climbed above 0.5 percent for the first time since April 2012 as a government report showed industrial production rose in April. Gilts have underperformed German bunds every day since June 4, when industry data showed the U.K.’s construction industry unexpectedly expanded last month. Investors bid for 1.52 times the amount of 10-year bonds sold today, down from a bid-to-cover ratio of 1.68 on April 9. The pound was little changed.

“The sale was marginally disappointing,” said Robin Marshall, a director of fixed income in London at Smith & Williamson Investment Management, which oversees about $22 billion. “The cover wasn’t fantastic. I wouldn’t be hurrying in to buy it, but we’re getting back into the buying zone” in terms of yield, he said.

The yield on the current benchmark 1.75 percent gilt maturing in September 2022 climbed three basis points, or 0.03 percentage point, to 2.17 percent at the 5 p.m. close of trading in London after rising to 2.24 percent, the highest level since Feb. 14. The price fell 0.25, or 2.50 pounds per 1,000-pound face amount, to 96.47.

The two-year yield increased four basis points to 0.47 percent after reaching 0.51 percent, the most since March 2012.

Short Sterling

The difference between yields on short-sterling futures due in March 2014 and March 2015, a measure of future interest-rate expectations, widened seven basis points to 39 basis points, the most since April 2012 based on closing prices.

The U.K. Debt Management Office sold the 2.25 percent bonds maturing in September 2023 at an average yield of 2.365 percent, compared with 1.734 percent at the previous auction of similar-maturity debt on April 9.

“Ten-year yields were under pressure after today’s gilt auction,” Annalisa Piazza, an analyst at Newedge Group in London, wrote in a note to clients. “The auction attracted less interest than anticipated.”

The U.K. is scheduled to sell 2.25 billion pounds of gilts due in June 2032 on June 13.

Industrial production rose 0.1 percent from March, the London-based Statistics Office said. The median forecast of 28 economists in a Bloomberg News survey was for no change. Manufacturing (UKMPIMOM) production shrank 0.2 percent from the previous month when it expanded 1.1 percent.

Spread Widens

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds has widened five basis points this week to 57 basis points.

The Bank of England voted last week to keep its program of asset purchases, known as quantitative easing, unchanged at 375 billion pounds.

“The strength of the U.K. data means were are unlikely to see any more QE any time soon, which explains gilts’ underperformance,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London.

Gilts handed investors a loss of 1.9 percent this year through yesterday, according to the Bloomberg U.K. Sovereign Bond Index. German bonds dropped 1.2 percent and U.S. Treasuries declined 1.4 percent, separate Bloomberg indexes show.

The pound traded at $1.5585 after falling as much as 0.3 percent. The currency fell 0.1 percent to 85.10 pence per euro.

Sterling has gained 5.7 percent during the past three months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.7 percent and the euro appreciated 2.7 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


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