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Sterling surges to 18-month euro high

Tuesday, June 10 15:13:36

The pound reached the strongest level in 18 months versus the euro today as industrial production rose at the fastest annual pace since 2011, underlining the strength of the U.K.'s recovery relative to the euro area's.

Sterling extended its longest run of gains versus its 18- nation counterpart since March as U.K. growth spurs bets the Bank of England will hasten plans to raise interest rates, while the European Central Bank expands stimulus. The divergence is also seen in the government-bond market, with U.K. 10-year gilts yielding the most relative to German bunds in the history of the euro. Britain's Debt Management Office sold 3.25 billion pounds ($5.45 billion) of securities due in 2024 today.

"Sovereign divergence is at work here," said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London. "Large investors around the world are reassessing their currency holdings and money is shifting from the euro zone to the U.K. That's benefiting the pound."

The pound gained for a fifth day, climbing 0.1 percent to 80.80 pence per euro at 2:17 p.m. London time after reaching 80.64 pence, the strongest level since December 2012. Sterling fell 0.2 percent to $1.6763.

U.K. industrial output rose 0.4 percent in April from the previous month, when it increased a revised 0.1 percent, the Office for National Statistics said today in London. That matched the median of 29 analyst estimates in a Bloomberg survey. From a year earlier, output surged 3 percent, the most since January 2011. A similar report in France showed production shrank 2 percent in April versus 2013.

Buoyed by the stronger economy, sterling has jumped 7.9 percent in the past 12 months, the best performer after New Zealand's dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 1.8 percent, while the dollar slipped 0.6 percent.

As Britain's economic expansion surpasses forecasts, including those of the International Monetary Fund, more than half the 29 financial institutions surveyed by Bloomberg now see an increase in central bank rates by March. Forward contracts based on the sterling overnight interbank average, or Sonia, show investors are betting the benchmark rate will rise 25 basis points by next May.

The nine members of the Bank of England's Monetary Policy Committee in London left the benchmark interest rate at 0.5 percent last week, while maintaining asset purchases under their quantitative-easing program at 375 billion pounds. In contrast, the ECB in Frankfurt introduced an unprecedented package of stimulus measures, including lowering its deposit rate below zero for the first time.

The U.K.'s 10-year yield rose one basis point, or 0.01 percentage point, to 2.71 percent today. The 2.25 percent gilt due in September 2023 fell 0.1, or 1 pound per 1,000-pound face amount, to 96.245.

That left the extra yield that investors get for holding the U.K. 10-year securities instead of German bonds at 133 basis points today, the widest since before the euro's introduction in 1999, based on closing prices.

The London-based debt office sold gilts maturing in September 2024 at an average yield of 2.82 percent, compared with 2.817 percent at a previous auction on April 29. Investors bid for 2.04 times the amount of securities allotted, up from 1.74 times in April.

Gilts returned 3.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries earned 2.7 percent and German securities gained 4 percent. (Bloomberg)