U.K. gilts rose as a Bank of England policy maker said inflationary pressures remain low, buoying the case for extending asset purchases to nurse the economic recovery.
The advance pared 10-year bonds’ first quarterly drop in a year. Gilts stayed higher even as a report showed retail sales improved last month. Spare industrial capacity will weigh on the country’s “very muted” domestically generated inflation pressures, Bank of England policy maker David Miles said in a speech yesterday in Arlington, Virginia. Governor Mervyn King said he was open-minded on whether more stimulus was needed. The pound climbed above $1.60 for the first time since November.
“The market believes there’s still willingness to do a bit more even though they own a lot of gilts already,” Lyn Graham- Taylor, a fixed-income strategist at Rabobank International in London, said of the central bank’s asset-purchase program.
Yields on the 10-year gilt fell seven basis points, or 0.07 percentage point, to 2.26 percent at 5:08 p.m. London time, leaving it 23 basis points higher this year. The 4 percent bond due March 2022 gained 0.685, or 6.85 pounds per 1,000-pound ($1,596) face amount, to 115.395.
A gauge of annual sales growth was at zero this month, from minus 2 in February, the London-based Confederation of British Industry said today. The median prediction of 11 economists surveyed by Bloomberg was minus 5.
Gilts stayed higher as King said economic output may fall in the second quarter due to an extra public holiday.
King told lawmakers in Parliament’s upper house today in London that he didn’t know if more easing is going to be needed.
“We do make a fresh judgment each month,” he said. “We are prepared to change our mind each and every month. If we were to do more it would be in conventional gilt purchases.”
Investors remained concerned that the euro-area outlook may dent market sentiment, the U.K. central bank’s chief economist Spencer Dale said in a Quarterly Bulletin published today.
Demand for investments “perceived to be more liquid or carrying less credit risk” helped to keep gilt yields low, the Bank of England said in the report. There was “little market reaction” to the decision by Moody’s Investors Service to change the outlook on the U.K.’s Aaa credit rating to negative from stable, the bank said.
U.K. debt securities returned 14 percent in the past 12 months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They rose as investors sought a refuge from the euro-region’s debt crisis and as the U.K. economy contracted in the fourth quarter, fueling bets the central bank may add to its bond purchases.
The pound reached its strongest level in more than four months versus the dollar amid speculation the government may be selling its stake in Royal Bank of Scotland Group Plc. Sterling was little changed at $1.5971, after being as high as $1.6001. It was 0.2 percent stronger at 83.51 pence against the euro.
“M&A talk is a factor,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a client note, referring partly to speculation British officials held talks with potential investors including Middle Eastern sovereign-wealth funds about a sale of some of its 82 percent stake in RBS.
The government made presentations in countries including Abu Dhabi, two people with knowledge of the situation said yesterday. The discussions are at an early stage and no deal is imminent, said the people, who declined to be identified because the talks are private.
Sterling has gained 1.1 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar weakened 0.8 percent and the euro slid 2.4 percent.
To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at firstname.lastname@example.org
To contact the editor responsible for this story: Daniel Tilles at email@example.com