U.K. two-year notes headed for their biggest weekly fall since Dec. 14 after the Federal Reserve's emergency interest-rate cut boosted confidence in global markets, crimping appetite for the safety of government debt.
The decline pushed yields on two-year notes to the highest this year as investors reversed safe-haven buying and shifted money into stocks, driving the U.K.'s FTSE 100 Index to the first weekly gain in a month. Two-year U.K. notes dropped with their counterparts in Europe and the U.S. today as the risk of European companies defaulting on their debt fell.
"It's very difficult to disentangle gilts from what's happening to every other bond market," said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam, a unit of the biggest Dutch financial-services company. "There's been a turnaround in the pricing of risk and there's been a lot of positives out there that have taken away the flight-to-safety theme."
The yield on the two-year note rose 15 basis points this past week, and 9 basis points today, to 4.44 percent by 2:55 p.m. in London, the highest since Dec. 31. The price of the 5.75 percent security due December 2009 dropped 0.29, or 2.9 pounds per 1,000-pound face amount, to 102.31.
The spread, or difference in yields, with 10-year gilts narrowed 7 basis points to 12 basis points as shorter-dated notes underperformed longer-term debt. The spread was 13 basis points a week ago and as much as 23 basis points on Jan. 22.
Ten-year gilts dropped today, with yields gaining 2 basis points to 4.56 percent. The bonds were also poised for a weekly decline, with the yield rising 13 basis points since Jan. 18.
Longer-Dated Gilts
Garvey favors longer-dated gilts and forecasts 10-year yields will fall to 4.25 percent by the end of the first quarter, with the possibility of slipping to 4 percent if the global economic outlook worsens.
The FTSE 100 rose 1.5 percent today and 1 percent this past week, rebounding from near the lowest since November 2005.
The risk of European companies being unable to repay their debt fell, according to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Series 8 Index of 50 companies with mainly high-risk, high-yield credit ratings dropped 20 basis points to 428, according to JPMorgan Chase & Co. The index, a benchmark for the cost of protecting bonds against default, declines when perceptions of credit quality improve.
Economic Stimulus Plan
Appetite for riskier investments was also boosted as U.S. lawmakers moved closer to passing an economic stimulus plan to avert a recession in the world's largest economy. House leaders yesterday reached a tentative agreement on legislation that would give many Americans tax rebate checks of at least $300.
The pound strengthened against the dollar and the euro, heading for weekly gains, as Scottish & Newcastle Plc, the U.K.'s largest brewer, accepted a 7.8 billion-pound ($15.4 billion) offer from Carlsberg A/S and Heineken NV.
The U.K. currency rose to $1.9846 from 1.9554 at the end of last week, its first weekly gain in four and 0.4 percent higher on the day. It climbed 0.8 percent this past week to 74.17 pence per euro, near the highest in a month. The pound also snapped five weeks of declines versus the yen, advancing to 213.70 from 208.97.
The Fed cut its target for overnight loans between banks by three quarters of a percentage point to 3.5 percent on Jan. 22, its first emergency reduction since 2001. There's a 100 percent chance U.S. policy makers will lower the rate by at least a further quarter-point on Jan. 30, futures prices showed.
The Bank of England will cut its main rate a quarter-point to 5.25 percent on Feb. 7, according to all 30 economists surveyed by Bloomberg News.