Bloomberg News

Gilt Yields Fall to Records as BOE Says May Consider Rate Cut

July 18, 2012

U.K. government bonds rose, with two- and five-year yields falling to records, after Bank of England policy makers said they may consider the case for cutting interest rates again.

Ten-year yields fell to the lowest level in six weeks after minutes of the central bank’s July meeting released today showed the Monetary Policy Committee may review the case for more rate cuts after assessing the impact of new liquidity measures. Policy makers voted 7-2 to boost asset purchases at the meeting, the minutes showed. The pound fell versus the dollar as traders added to bets the central bank will lower borrowing costs.

“The minutes were slightly more dovish than expected,” said Vatsala Datta, an interest-rate strategist at Lloyds Banking Group Plc (LLOY) in London. “The probability of a rate cut has increased after the November meeting. The market is definitely pricing in a possibility of that.”

The two-year gilt yield fell four basis points, or 0.04 percentage point, to 0.16 percent at 4:10 p.m. in London after dropping to 0.144 percent, the lowest since Bloomberg began tracking the securities in 1992. The 2.25 percent note due in March 2014 rose 0.065, or 65 pence per 1,000-pound ($1,566) face amount, to 103.41.

The five-year yield slid five basis points to 0.5 percent, after dropping to a record 0.472 percent. The 10-year yield fell as low as 1.45 percent, the least since June 1, when it declined to a record 1.439 percent.

Two Dissenters

The Bank of England increased asset purchases by 50 billion pounds to 375 billion pounds at its July 4-5 meeting and kept its benchmark interest rate at a record low 0.5 percent. Spencer Dale and Ben Broadbent dissented in favor of no change to the target for so-called quantitative easing, according to the minutes published today.

So-called Sonia rates indicate the central bank will reduce its benchmark to 0.234 percent by April, according to Tullett Prebon Plc. Sonia, or the Sterling Overnight Index Average, is the reference rate for overnight unsecured transactions in sterling and is endorsed by the British Bankers’ Association.

Shorter-maturity gilts are “discounting a significant probability of a rate cut,” Lloyds’ Datta said. “They have already done quantitative easing and there is some expectation of further QE at the November meeting.”

Pound Weakens

Sterling dropped 0.2 percent to $1.5631 after rising to $1.5678 yesterday, the strongest since July 4. The pound gained 0.2 percent at 78.40 pence per euro, after rising to 78.30 pence, the most since October 2008.

The pound has appreciated 3.3 percent in the past six months, the best performer of the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro dropped 3.5 percent in the same period.

Ten-year gilt futures may extend gains should they remain above a level of so-called support, according to UBS AG, citing trading patterns.

“Gilts are bullish while they trade above 120.83,” which is their low of July 13, Richard Adcock, head of fixed-income technical strategy in London, wrote in a note to clients. The securities may initially advance to 121.86, the June 1 session high, he said.

The 10-year futures contract expiring in September rose 0.3 percent to 121.67.

Gilts have returned 3.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.2 percent, and U.S. Treasuries rose 2.6 percent, the indexes show.

The Bank of England bought 1 billion pounds of gilts maturing between seven and 15 years today as part of its bond- purchase plan. The Debt Management Office is scheduled to sell 1.75 billion pounds of bonds due in July 2052 tomorrow.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Roxana Zega in London at rzega@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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