Bloomberg News

Gilts Rise on Bets Bank of England Moving Closer to Buying Bonds

September 29, 2011

Sept. 29 (Bloomberg) -- U.K. gilts rose, driving 10-year yields lower for the first time in five days, amid speculation the central bank is preparing to add economic stimulus by purchasing bonds as soon as next month.

The yield on two-year notes fell the most in a week after Bank of England Chief Economist Spencer Dale said policy makers have the tools available to provide additional “monetary loosening.” U.K. house prices were little changed in September and “downside risks” to the property market have increased as economic prospects weaken, Nationwide Building Society said. A separate report showed mortgage approvals rose last month.

“Given the potential magnitude of announcement effects, it would make sense for gilts to remain relatively supported,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. The central bank is likely to start a so-called quantitative-easing program with 50 billion pounds ($78 billion) of debt purchases in November, he said.

The yield on 10-year bonds fell six basis points to 2.49 percent at 1:34 p.m. in London. The 3.75 percent security maturing in September 2021 advanced 0.595, or 5.95 pounds per 1,000-pound face amount, to 111.030. The two-year note yield declined two basis points to 0.58 percent after dropping to as low as 0.55 percent.

Sterling climbed 0.4 percent to $1.5638, and was little changed at 87.07 pence per euro.

Economic Stimulus

Yields on 30-year gilts reached a record-low 3.45 percent on Sept. 23 as speculation that Bank of England officials are moving closer to adding economic stimulus. Most of the nine- member Monetary Policy Committee said that more bond purchases are “increasingly probable,” according to minutes from this month’s meeting.

While Dale said inflation may exceed 5 percent in the coming months, meaning restarting asset purchases isn’t a “no- brainer,” he also said that the global slowdown now looks “more persistent,” according to an interview with the Daily Mail newspaper published in London today. MPC member Ben Broadbent said on Sept. 26 that he was “reasonably close” to voting for more QE, while David Miles said the case for stimulus has become more “finely balanced.”

Ten-year gilts rose 1.7 times their average change over the past 90 days, the second-highest among 24 developed markets monitored by Bloomberg.

Home Costs

“The increasing likelihood of further QE in the U.K. is driving the price action in gilts,” said Nishay Patel, a fixed- income strategist at Citigroup Inc. in London. “We expect the Bank of England to announce QE in the U.K. soon.”

The average cost of a home rose 0.1 percent from August, the Nationwide said today. From a year earlier, values were down 0.3 percent.

The outlook for the property market has darkened as the euro-area debt crisis weighs on the economy and pushes up banks’ funding costs. While data today showed U.K. mortgage approvals rose in August to the highest in 20 months as record-low borrowing costs supported housing demand, they’re still only about half the monthly average in the decade to 2007, before the financial crisis struck.

Gilts have returned 7.8 percent in the third quarter, more than the 7.1 percent increase in German bunds and 6.1 percent gain from U.S. Treasuries, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies showed. Sterling is 2.6 percent weaker against the greenback in the period, while it has strengthened 3.7 percent versus the euro.

The Bank of England will report its next interest-rate and bond-buying decisions on Oct. 6.

--With assistance from Fergal O’Brien and Jennifer Ryan in London. Editors: Mark McCord, Matthew Brown

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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