U.K. government bonds fell, snapping a four-day advance, as an industry report showing house prices increased in October added to evidence the economy is strengthening and sapped demand for safer assets.
Benchmark 10-year yields rose from the lowest level in 11 weeks after the Federal Reserve said the U.S. economy shows signs of “underlying strength,” fueling speculation it will begin tapering stimulus sooner than previously expected. Benchmark U.K. yields are still poised for the biggest monthly decline since March. The pound strengthened for a second day versus the euro.
“Gilts look pretty rich given the improving U.K. economy,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The rally has probably gone as far as it can go. The Fed caught the market by surprise because the statement wasn’t as dovish as expected, they are still on course to reduce stimulus and that’s put a bit of pressure on gilts.”
The U.K. 10-year yield rose two basis points, or 0.02 percentage point, to 2.56 percent at 8:53 a.m. London time after dropping to 2.54 percent yesterday, the lowest since Aug. 13. The 2.25 percent bond due in September 2023 fell 0.18, or 1.80 pounds per 1,000-pound ($1,604) face amount, to 97.30. The yield dropped 16 basis points this month.
Home values rose 1 percent this month from September when they climbed 0.9 percent, Nationwide Building Society said. GfK NOP Ltd. said its consumer-sentiment index declined to minus 11 in October from minus 10 the previous month.
The Federal Open Market Committee in a statement yesterday repeated it will keep buying $85 billion of bonds each month until “the outlook for the labor market has improved substantially.” The U.S. central bank removed a sentence from its previous statement in September that had said tighter financial conditions could slow the improvement in the economy.
Gilts returned 1.4 percent in the month through yesterday, according to Bloomberg World Bond Indexes. Treasuries gained 0.5 percent and German bonds advanced 0.4 percent.
The pound rose 0.2 percent to 85.50 pence per euro after depreciating to 85.85 pence on Oct. 29, the weakest since Aug. 29. Sterling was little changed at $1.6037.
The pound fell 1.4 percent in the past month, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.1 percent, while the dollar dropped 0.4 percent.
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