Gilts Fall as ECB Bond-Buying Plan Damps Demand for Safer Assets

U.K. 10-year government bonds fell for a second day as the European Central Bank unveiled a bond- buying program to stem the euro-region’s debt crisis, damping demand for the safest assets.

Ten-year gilt yields rose to the highest level in two weeks after the Bank of England refrained from extending its bond- purchase stimulus measures and held its key interest rate at a record low. ECB President Mario Draghi said policy makers agreed to buy unlimited amounts of government debt to regain control of borrowing costs in the euro area and fight speculation of a currency breakup. The pound advanced to the highest level in over three months against the dollar.

Gilts are lower as “Draghi has gone about as far as we could have expected and there’s generally a more buoyant tone for risk,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London.

The yield on 10-year gilts rose six basis points, or 0.06 percentage point, to 1.71 percent at 4:21 p.m. London time, after climbing to 1.72 percent, the highest since Aug. 20. The 1.75 percent bond due September 2022 fell 0.585, or 5.85 pounds per 1,000-pound ($1,593) face amount, to 100.39.

Gilts have returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 3.3 percent and U.S. Treasuries earned 2.5 percent.

Expanding Stimulus

The Bank of England’s Monetary Policy Committee kept its bond-purchase target at 375 billion pounds, as forecast by 38 of 39 economists in a Bloomberg News survey. A separate survey shows economists see the MPC expanding stimulus to 400 billion pounds by the end of 2012. Policy makers led by Governor Mervyn King left the benchmark interest rate at 0.5 percent, as predicted by all 51 economists surveyed.

The ECB held its benchmark interest rate at 0.75 percent.

The pound rose 0.2 percent to $1.5929 after touching $1.5943, the highest level since May 16. Sterling was little changed versus the euro at 79.27 pence. It dropped to 79.56 pence on Aug. 31, the weakest since Aug. 7.

“We expect U.K. activity to remain soft and for the MPC to conclude at the November meeting that more stimulus is required,” David Tinsley, an economist at BNP Paribas SA in London, wrote in an e-mailed note.

Policy makers last increased asset purchases by 50 billion pounds in July and began a facility with the government -- the Funding for Lending Scheme -- to boost credit to companies and households.

The pound has gained 1.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 0.6 percent and the euro rose 1.5 percent.

Gross domestic product in Britain will shrink 0.7 percent this year instead of the previously predicted expansion of 0.5 percent, the Organization for Economic Cooperation and Development said today.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

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

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