Bloomberg News

U.K. Gilts Drop as BOE Signals Unlikely to Cut Rates

November 24, 2012

U.K. gilts fell for the first time in five weeks as Bank of England minutes signaled policy makers won’t cut interest rates and showed they voted 8-1 to halt their asset-purchase program, or quantitative easing, this month.

The pound depreciated for a second week versus the euro amid optimism European policy makers are taking steps to stem Greece’s fiscal crisis. Sterling advanced against the dollar for the first time in a month on bets U.S. lawmakers will forge a deal to avert the so-called fiscal cliff of automatic spending cuts and tax increases, damping demand for the world’s reserve currency. The 10-year gilt yield climbed to the highest level in three weeks.

“The minutes were quite bearish for gilts, suggesting the bar for more QE has been set higher,” said Jason Simpson, a rates strategist at Banco Santander SA (SAN) in London. “They also expressly ruled out a near-term rate cut and seem to be moving to a new view on the economy that more QE is not going to solve the underlying economic growth issues.”

The benchmark 10-year gilt yield climbed 11 basis points, or 0.11 percentage point, this week to 1.84 percent as of 5 p.m. London time yesterday, the first weekly increase since Oct. 19. The 1.75 percent bond due in September 2022 fell 0.99, or 9.90 pounds per 1,000-pound ($1,603) face amount, to 99.18. The rate rose to 1.87 percent on Nov. 22, the highest since Nov. 2.

BOE Minutes

The minutes released on Nov. 21 showed that policy maker David Miles dissented from the majority on the nine-member Monetary Policy Committee, calling for a 25 billion-pound increase in the bond-purchase target to 400 billion pounds. The committee voted unanimously to keep its benchmark interest rate at a record-low 0.5 percent and said it was “unlikely to reduce” it in the foreseeable future.

The pound fell 0.8 percent from Nov. 16 to 80.84 pence per euro. It reached 81.09 pence yesterday, the weakest level since Oct. 24. The U.K. currency rose 0.9 percent this week to $1.6028, its first weekly advance since Oct. 26.

Sterling has weakened 1.9 percent in the past six months, the third-worst performer after the yen and the dollar of the 10 developed-market currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen fell 7.9 percent, the dollar dropped 4.2 percent and the euro slid 1 percent.

A report due to be published on Nov. 27 will show the U.K. gross domestic product grew 1 percent in the third quarter, confirming an earlier reading, according to the median estimate of 24 economists surveyed by Bloomberg News. The data comes after Prime Minister David Cameron defended the U.K.’s demand for a budget rebate in talks with European leaders yesterday.

Gilts returned 2.6 percent this year through Nov. 22, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.4 percent and U.S. Treasuries rose 2.4 percent.

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

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


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