U.K. Gilts Post Weekly Decline on View Rates Will Keep Rising

By Anchalee Worrachate

July 7 (Bloomberg) -- Gilts fell this week, pushing 10-year yields to the highest in more than seven years, on speculation the Bank of England will keep raising the cost of borrowing to cool inflation.

The BOE raised rates for a fifth time in 12 months this week, to a six-year high of 5.75 percent, and signaled further increases may be needed. The central bank said inflation risks in the medium term ``lie to the upside.'' The government said yesterday factory production rose in May to the highest in almost six years, a sign rates aren't too high to support economic expansion.

``Yields are going to move higher from here,'' said Graeme Caughey, who helps manage 100 billion pounds of assets for Scottish Widows Investment Partnership Ltd. in Edinburgh. Bonds maturing in 10 years or more ``still have to price in some of these moves'' in interest rates by the Bank of England.

The yield on the 4 percent gilt maturing in September 2016 rose to as high as 5.55 percent yesterday, the highest since February 2000, from 5.45 percent at the end of last week.

The yield was at 5.54 percent at 4:28 p.m. yesterday in London. The price of the bond fell 0.55, or 5.5 pounds per 1,000- pound ($2,013) face amount, to 89.06 from June 29.

Two-year yields rose 4 basis points from last week to 5.80 percent. Yields move inversely to prices.

The pound rose 0.2 percent versus the dollar this week after earlier falling as strong U.S. economic reports prompted a decline in the extra yield U.K. bonds offer over Treasuries.

U.S. Payrolls

The yield gap between Britain's 10-year gilts and U.S. debt shrank after the Labor Department said yesterday U.S. employers added more jobs in June than expected. The spread between 10-year gilts and Treasuries narrowed to 37 basis points after the data were released, from 46 points on July 4.

The pound traded at $2.0129 late yesterday, from $2.0087 on June 29. Earlier this week it rose to as high as $2.0207, the strongest since June 1981. The currency was at 67.73 pence per euro from 67.60 on July 5.

``The broader theme on the market is ongoing sterling strength,'' said Gavin Friends, head of currency strategy at Commerzbank AG in London.

The pound has gained 2.5 percent against the dollar and around 6 percent against the yen this year as investors bought the currency to take advantage of the highest benchmark interest rates among the Group of Seven industrialized countries.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net