Gilts Advance as BOE Damps Optimism on U.K. Economy; Pound Slips

U.K. government bonds advanced for a second day as speculation that Britain’s economy will require further stimulus lifted demand for the safest assets.

Ten-year yields fell to a two-week low as Bank of England Deputy Governor Charles Bean cautioned against over-optimism following third-quarter gross domestic product data. Policy makers will decide Nov. 8 whether to increase bond purchases, or quantitative easing, to boost the economy. German bunds rose as Spain’s Premier Mariano Rajoy said he will request a bailout when he judges it’s in the nation’s interests. The pound weakened versus the dollar and the euro.

“Gilts are tracking the move in German bunds today as there continues to be uncertainty over a Spanish aid request,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “Comments over the weekend from BOE’s Bean have helped balance out the anti-QE rhetoric that prevailed last week. That is helping gilts to keep up with bunds.”

U.K. 10-year yields dropped six basis points, or 0.06 percentage point, to 1.80 percent at 4:12 p.m. London time, the least since Oct. 16. The 1.75 percent gilt maturing September 2022 advanced 0.575, or 5.75 pounds per 1,000-pound ($1,605) face amount, to 99.52.

Raise Target

Hill said RBC stuck by its forecast for the Bank of England to raise its asset-purchase target by 50 billion pounds to 425 billion pounds next month.

U.K. gross domestic product expanded 1 percent in the three months through September from the previous period, the fastest growth since 2007, the Office for National Statistics said on Oct. 25. That exceeded the highest estimate in a Bloomberg News survey for a 0.8 percent increase.

The figures were “stronger than we expected, but we should avoid getting over-excited,” Bean said in an interview with Sky News television yesterday. “It’s quite possible that we see weak growth in the next quarter. The big picture is of an economy that’s been bumping along the bottom.”

The strongest growth in five years last week prompted economists at Barclays Plc and Investec Securities to abandon forecasts for the Bank of England to boost its bond-buying program next month.

Overseas investors increased their holdings of U.K. government bonds for a third month in September, according to Bank of England data.

Increased Holdings

Non-residents bought 1.84 billion pounds more gilts than they sold last month, after raising their holdings by 5.57 billion pounds in August, the data showed.

Spain has yet to request a bailout that would trigger European Central Bank purchases of its debt. The plan, unveiled by ECB President Mario Draghi last month, is designed to draw a line under the region’s debt crisis.

“As soon as I think that it’s good for the general interests of Spain to ask for it I will ask for it,” Rajoy said today at a joint press conference with Italy’s Prime Minister Mario Monti in Madrid. “While I don’t think that, I won’t.”

The U.K. Debt Management Office is scheduled to auction 1.5 billion pounds of three-year debt tomorrow. The 4.75 percent gilt due in September 2015 being sold yielded 0.27 percent in secondary-market trading. The U.K. last sold three-year securities on May 19, 2011, at an average yield of 1.456 percent.

Gilts returned 2.4 percent this year through Oct. 26, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.8 percent and U.S. Treasuries earned 1.8 percent.

Pound Falls

The pound fell for a second day against the dollar after an industry report showed house prices in England and Wales dropped for a fourth month in October.

Home prices declined 0.1 percent from September and 0.4 percent from a year earlier, Hometrack Ltd., a London-based property research group, said in an e-mailed statement. U.K. mortgage approvals rose to 50,000 last month from 47,700 in August, a separate report showed.

An index of retail sales compiled by the Confederation of British Industry climbed to 8 in October from 6 a month earlier, according to the median forecast of 10 analysts in a Bloomberg survey. The report is scheduled for release at 11 a.m. London time tomorrow.

The pound declined 0.5 percent to $1.6019 after gaining 0.6 percent last week. Sterling weakened 0.2 percent to 80.52 pence per euro after touching 80.02 pence on Oct. 26, the strongest since Oct. 3.

The U.K. currency will end the year at $1.61 and 80 pence per euro, according to median estimates in Bloomberg surveys.

The pound has risen 1.8 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro weakened 2.3 percent and the dollar dropped 1.8 percent.

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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