Bloomberg News

U.K. Gilts Decline After Posen Says BOE Could Buy Other Assets

February 03, 2012

Feb. 2 (Bloomberg) -- U.K. 10-year bond yields climbed to the highest level in a week after Bank of England policy maker Adam Posen said the central bank could purchase assets other than gilts.

Two-year notes pared an earlier advance. Posen spoke as the central bank completed a 275 billion-pound ($435 billion) asset purchase-program to boost the economy. The pound weakened against all but one of its 16 most-traded peers tracked by Bloomberg. The central bank announced the expansion of bond buying, called quantitative easing, in October and said today it will review whether the economy needs further stimulus based on new inflation projections.

Posen’s comments indicate “we might expect that they would be buying less gilts,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. They would “hence be buying linkers and possibly corporate bonds,” he said. Linkers are inflation-linked securities.

The 10-year gilt yield rose four basis points, or 0.04 percentage point, to 2.09 percent at 6:07 p.m. London time, after jumping as much as seven basis points to 2.12 percent, the most since Jan. 26. The 3.75 percent security due September 2021 fell 0.375, or 3.75 pounds per 1,000 pound face amount, to 114.36. Two-year note yields were two basis points lower at 0.38 percent.

Posen of the Monetary Policy Committee said today in a speech in London it “would not be the end of the world were the MPC, as part of its monetary policy efforts, to buy things other than gilts.”

Small Enterprises

A public provider of loans to small and medium-sized enterprises is needed to stoke the flow of credit to them, and monetary policy is capable of playing a role in aiding the process by buying the debt, Posen said.

The official said he’s “leaning” toward more stimulus next week, and there is a case to increase the bond-purchase target by a further 75 billion pounds.

“Seventy-five billion was a good slug last time and there’s a case to do it again,” he said in an interview on “Last Word” on Bloomberg Television in London.

Policy makers will begin a two-day meeting on Feb. 8, when they will have new inflation forecasts.

“Until we get an announcement from the BOE one way or another, we can’t assume fully that they’re going to do any more” QE, said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “If you perceive any chance of them not endorsing that, the chances are you’d get a pretty significant rise in yields.”

Wraith said he expects the central bank to announce a further 50 billion pounds of stimulus “at least” on Feb. 9.

The pound was little changed at 83.17 pence per euro and weakened 0.2 percent to $1.5803.

--Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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