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Gilts Advance on Speculation Government May Continue to Purchase Assets

U.K. government bonds rose, pushing the 10-year gilt yield down for the second day this week, before the Bank of England meets to consider whether to restart bond purchases to boost economic growth.

The pound also fell against the euro ahead of the central bank’s Monetary Policy Committee meeting tomorrow. Policy maker Adam Posen last week advocated further asset purchases, or quantitative easing, saying monetary policy “should continue to be aggressive about promoting recovery.” He has since been backed by the British Chambers of Commerce and the Institute of Directors.

“Gilts will continue to climb as overwhelmingly the market is bracing for lower growth and more easing in the U.K., particularly after the speech by MPC member Adam Posen last week,” said Matteo Regesta, an interest-rate strategist at BNP Paribas SA in London. “At the moment, we would rule out easing in this year. The earliest risk of it happening would be first quarter next year.”

The yield on the 10-year bond fell 8 basis points to 2.9 percent as of 4:59 p.m. in London. The 4.75 percent security maturing March 2020 increased 0.62, or 6.2 pounds per 1,000- pound ($1,590) face amount, to 115.20. The two-year yield fell 4 basis points to 0.62 percent.

Gilts have gained 9.7 percent since the end of 2009, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. German government bonds earned 9.2 percent, while U.S. Treasuries returned 9 percent.

Big Buyer

Regesta said bonds were boosted today because a large investor had bought a so-called swap betting on 10 years of subdued inflation. The investor made the trade because of optimism that the U.K. government’s budget cuts will hold down inflation and boost gilt prices, Regesta said without explaining where he got his information. The U.K.’s coalition government will outline cuts on Oct. 20 in its spending review.

The Institute of Directors, a London-based lobby group, said in an e-mailed statement yesterday that the “time has now come” for the MPC to increase asset purchases by 50 billion pounds to 250 billion pounds. The median forecast of 36 economists in a Bloomberg News survey is for no change.

The group’s stance aligns it with the British Chambers of Commerce, whose chief economist, David Kern, said in a Sept. 30 interview that further stimulus was needed to boost growth.

The pound today depreciated versus 12 of its 16 most traded peers ahead of the MPC’s decision on whether to resume asset purchases after keeping its bond-buying program at 200 billion pounds for the past 11 months.

‘Poor Place’

It depreciated 0.6 percent to 87.6 pence per euro, its lowest since May 21. It climbed 0.1 percent against the dollar to $1.5909. Sterling has lost 5 percent this year against its developed-countries peers, according to Bloomberg Correlation- Weighted Currency Indexes.

“Sterling has been left in a pretty poor place, as the debate in the U.K. is focused on more quantitative easing,” said Steve Barrow, London-based head of Group of 10 foreign- exchange research at Standard Bank. “The market is not going to respond well to that, and the euro is going to stay pretty firm.”

The pound earlier rose against the euro after Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction. The euro-region country was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement.

To contact the reporter on this story: Stephen Morris in London at smorris39@bloomberg.net.

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

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