Bloomberg News

U.K. 10-Year Yield Drops From 2-Month High Before BOE Decision

February 09, 2012

Feb. 8 (Bloomberg) -- U.K. 10-year gilts rose, pushing yields down from the highest in two months, amid speculation the Bank of England will announce an extension of asset purchases at the end of its monthly meeting tomorrow.

The pound weakened for the first time in four days versus the dollar as equities fell amid concern Greece is struggling to reach an agreement to secure a second international aid package. U.K. policy makers will increase bond purchases, or so-called quantitative easing, by 50 billion pounds ($79.4 billion) after their two-day meeting, according to analyst estimates in a Bloomberg News survey.

“Equities are dipping a bit and that is giving support to gilts,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Also, investors are looking forward to tomorrow’s Bank of England meeting and it’s almost certainly going to raise QE. The question is if it’s going to be by 50 or 75” billion pounds.

The 10-year gilt yield dropped three basis points, or 0.03 percentage point, to 2.19 percent at 4:34 p.m. London time, after climbing to 2.25 percent, the highest since Dec. 8. The 3.75 percent bond maturing in September 2021 rose 0.275, or 2.75 pounds per 1,000-pound face amount, to 113.

Gilts have handed investors a loss of 1.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Germany’s bonds declined 0.7 percent.

Bond Purchases

The central bank’s Monetary Policy Committee boosted the ceiling on bond purchases to 275 billion pounds in October, starting a round of buying that ended on Feb. 2. Policy makers will increase the target by 50 billion pounds this week, according to 34 of the 50 economists surveyed by Bloomberg. Fifteen forecast a 75 billion-pound increase, and one sees no change. A separate survey predicted the central bank will keep its benchmark interest rate at 0.5 percent.

“If it’s 50 billion pounds, which at one stage would have been a bit smaller than the market was hoping for, then I think we would see at least a brief positive response from gilts,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “If it was 75 billion, I think that would be a little bit more emphatic.”

Since the Bank of England expanded its debt-purchase program on Oct. 6, gilts have returned 0.3 percent after volatility was taken into account, according to Bloomberg risk- adjusted return rankings. The figure is calculated by dividing total returns by a gauge of daily price-swings, giving a measure of income per unit of risk. The returns are not annualized.

Greek Progress

Greek Prime Minister Lucas Papademos held an unscheduled meeting late yesterday with the European Commission, European Central Bank and International Monetary Fund to put the final touches on terms needed for a 130 billion-euro ($173 billion) rescue package. He met leaders of the political parties supporting his interim government today in Athens after delaying the gathering for a second time.

The pound dropped 0.6 percent to $1.5808 and fell 0.4 percent to 83.75 pence per euro.

Sterling has weakened 1.2 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar declined 3 percent and the euro dropped 0.7 percent.

--Editors: Mark McCord, Nicholas Reynolds

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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