Bloomberg News

Gilts Rise on Bets Central Banks to Buy More Bonds; Pound Gains

January 26, 2012

Jan. 26 (Bloomberg) -- U.K. government bonds rose a second day on speculation central banks will take additional steps to keep down borrowing costs after the Federal Reserve signaled it may soon buy more securities to cap borrowing costs.

Ten-year gilt yields fell toward a record low set on Jan. 18 before a report that economists estimated will show a retail sales index fell in January. The securities also advanced as Greece prepared to resume bond-swap talks with creditors amid concern the cost of the rescue is mounting. The Fed extended its pledge to keep interest rates low until late 2014 after a policy-maker meeting yesterday. Sterling rose versus the dollar.

“The fact that the Fed is committed to keeping rates low for a prolonged period of time supports government bonds including gilts,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The Bank of England may not go that far, but we have no doubt it will expand the quantitative-easing program to keep borrowing costs down across the gilt yield curve.”

Benchmark 10-year gilt yields dropped two basis points, or 0.02 percentage point, to 2.13 percent at 10:03 a.m. London time. The yield fell to a record-low 1.917 percent on Jan. 18. The 3.75 percent security maturing in September 2021 rose 0.21, or 2.10 pounds per 1,000-pound ($1,311) face amount, to 113.97.

The pound rose 0.3 percent to $1.5704. It weakened 0.2 percent to 83.83 pence against the euro.

Gilts outperformed German bonds, with the extra yield investors demand to hold 10-year U.K. securities instead of bunds narrowing by two basis point to 19 basis points.

--Editors: Paul Dobson, Nicholas Reynolds

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

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


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