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Gilt Yields Drop to Five-Week Low on BOE’s Debt Reduction Plan

November 09, 2012

U.K. bonds rose, with 10-year yields falling to a five-week low, after the Bank of England said it planned to transfer coupon payments it receives from its gilt holdings to the Treasury to lower the nation’s debt.

The Treasury will use the money to reduce the stock of outstanding bonds, reducing the amount of gilts held by the private sector and increasing the amount of money in the economy, implying “an easing in monetary conditions,” Governor Mervyn King wrote in a letter to Chancellor of the Exchequer George Osborne published today on their websites. The pound dropped to a two-month low against the dollar.

“Potentially this means the government’s net cash requirement could go down” by 11 billion pounds ($17.5 billion) in this financial year and 23.8 billion pounds the next, said Jason Simpson, a rates strategist at Banco Santander SA (SAN) in London. “The issuance profile could look considerably lower in the near-term, which is good news for gilts.”

U.K. 10-year yields dropped four basis points, or 0.04 percentage point, to 1.73 percent at 4:39 p.m. London time after falling to 1.67 percent, the lowest since Oct. 5. The 1.75 percent gilt maturing in September 2022 rose 0.38, or 3.80 pounds per 1,000-pound face amount, to 100.175. The rate has declined 12 basis points this week, the most since the period ended Sept. 21.

Coupon Payments

The money to be transferred to the Treasury from the central bank comes largely from coupon payments on the bonds already purchased through the 375 billion-pound Asset Purchase Facility.

“The market has rallied on this, presumably on the assumption that this means less gilt issuance,” Marc Ostwald, a rates strategist at Monument Securities Ltd. in London, wrote in an e-mailed note. “Perhaps the more important aspect is how it reduces the pressure on Osborne to find more revenue and/or spending cuts in the short-term.”

Gilts fell yesterday after the Bank of England’s nine- member Monetary Policy Committee kept its target for bond purchases unchanged, ending its third round of so-called quantitative easing.

Gilts have returned 3.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4 percent and U.S. Treasuries earned 2.7 percent.

The pound weakened 0.5 percent to $1.5912, after reaching $1.5903, the lowest since Sept. 6. Sterling fell 0.2 percent to 79.91 pence per euro after advancing to 79.61 pence yesterday, the strongest level since Oct. 1.

The pound has gained 1.4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro dropped 3.4 percent and the dollar fell 1.3 percent.

To contact the reporter on this story: Neal Armstrong in London at

To contact the editor responsible for this story: Paul Dobson at

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