Bloomberg News

U.K. Gilt Yields Fall to Records Amid BOE Stimulus Speculation

May 25, 2012

Britain’s two- and five-year government bond yields fell to records amid speculation the Bank of England will add to its 325 billion-pound ($510 billion) program of asset purchases to rekindle U.K. growth.

The pound posted its fourth weekly drop against the dollar before reports next week that economists said will show consumer confidence worsened and manufacturing shrank, adding to signs the economy is contracting. Sterling pared a drop versus the euro amid concern Spain’s regional governments may lose access to capital markets. The U.K. sold 3.5 billion pounds of bills.

“The odds are shortening that the Bank of England is going to have to do more, but it won’t be until the next meeting at the earliest, barring a dramatic escalation of the crisis,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There is risk aversion generally about what’s going to happen in the euro zone and safe havens such as gilts are benefiting.”

The two-year gilt yield fell one basis point, or 0.01 percentage point, to 0.23 percent at 5:51 p.m. London time after declining to 0.216 percent, the lowest since Bloomberg began collecting the data in 1992. The rate slid eight basis points in the week. The 2.25 percent note due in March 2014 traded at 103.58. The five-year yield decreased two basis points to 0.72 percent and reached a record 0.707 percent.

Pressure on Cameron

The pound slipped 0.2 percent $1.5647, having tumbled 1.1 percent this week, and slid to the lowest level since March 13. The run of four straight weekly declines is the longest since the period ended Sept. 23. Sterling was little changed at 79.98 pence per euro after earlier dropping as much as 0.6 percent.

Gilts rallied two days ago, when minutes from the May meeting of the central bank’s Monetary Policy Committee showed that members voted 8-1 to halt its program of bond purchases and that the decision was “finely balanced” for some of them. The International Monetary Fund said on May 22 the U.K. central bank needs to inject more stimulus into the economy and said tax cuts may be needed unless growth strengthens.

Gross domestic product fell 0.3 percent last quarter, the Office for National Statistics said yesterday, a larger decline than last month’s estimate for a 0.2 percent contraction. Construction output slumped 4.8 percent, the most in three years.

The IMF comments ramped up the pressure on Prime Minister David Cameron to do more to spur growth, with his political opponents saying that Britain’s deeper-than-expected recession is the result of too much government-imposed austerity, rather than the turmoil in the euro-region.

Break-Even Rate

U.K. debt has returned 3 percent this month, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which gained 2 percent, and U.S. Treasuries, which rose 0.9 percent. The Debt Management office said today it was starting consultations with stakeholders on the potential sale of gilts maturing in more than 50 years.

A gauge of the inflation outlook fell to the lowest since December after the Times newspaper said the Statistics Authority may recommend changing the way it calculates the retail-price index.

The U.K. 10-year break-even rate, the difference in yield between nominal and inflation-linked bonds, dropped to the lowest since Dec. 14, narrowing as much as seven basis points to 2.55 percentage points.

Sterling Slips

The amendment to the retail-price index could lower interest payments on government bonds tied to inflation and, if it is made, the Bank of England would have to determine if it would have a “material” effect on gilt holders, the London- based Times said.

Sterling slipped 0.2 percent this week, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar gained 1.1 percent, and the euro weakened 1.3 percent.

The pound may fall to as low as $1.5465 if it breaks through two key levels of support, according to Credit Suisse Group AG technical analysts.

The U.K. currency may slip to that level, which represents the 78.6 percent Fibonacci retracement of the 2012 rally, should it fall below $1.5640, the 61.8 percent retracement of that move, and the March low of $1.56, analysts led by David Sneddon, the head of technical analysis in London, wrote in an e-mailed note to clients.

Support refers to an area on a price graph where buy orders may be clustered.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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


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