Gilts Rise Third Week on Speculation BOE to Boost Bond Purchases

U.K. government bonds rose for a third week as reports showing a decline in industrial production and service activity fueled speculation the central bank will need to increase asset purchases to spur growth.

Benchmark 10-year yields fell to the lowest level in two months as the Bank of England said it would transfer income from gilts it holds under its bond-buying program to the Treasury to reduce the nation’s debt burden. The central bank left its target for asset purchases, known as quantitative easing, at 375 billion pounds ($597 billion) at its Nov. 7-8 policy meeting. The pound dropped for a second week against the dollar.

“The data has been pretty poor this week and we feel that an expansion of QE isn’t too far away,” said Jamie Searle, a rates strategist at Citigroup Inc. in London. “If the data continues in this vein, gilts are likely to benefit.”

The U.K. 10-year yield fell 12 basis points, or 0.12 percentage point, this week to 1.74 percent, the biggest drop since the period ended Sept. 21. The yield declined to 1.67 percent yesterday, the least since Sept. 10. The 1.75 percent bond due in September 2022 rose 1.08, or 10.80 pounds per 1,000- pound face amount, to 100.135.

The Treasury plans to use the income from the bonds it bought under its asset-purchase plan to reduce the stock of outstanding debt, lowering the amount of gilts held by the private sector and increasing the amount of money in the economy, Governor Mervyn King wrote in a letter to Chancellor of the Exchequer George Osborne published yesterday.

‘Positive Action’

“All in all the announcement is clearly a positive action for the gilt market,” Citigroup’s Searle said. Gilt issuance is likely to be lower in the near-term, he said.

U.K. industrial output plunged 1.7 percent in September, after falling 0.5 percent in August, the Office for National Statistics said Nov. 6. A gauge of the service industry based on a survey of purchasing managers fell to a 22-month low of 50.6 in October, Markit Economics and the Chartered Institute of Purchasing and Supply said Nov. 5.

The Bank of England will announce its quarterly growth and inflation forecasts on Nov. 14. The government will release data for consumer prices on Nov. 13 and retail sales on Nov. 15.

Gilts returned 3.2 percent this year through Nov. 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4 percent and Treasuries rose 2.7 percent.

Sterling fell 0.7 percent this week to $1.5912 after falling 0.5 percent the previous week. The U.K. currency gained 0.2 percent to 79.91 pence per euro.

The pound has advanced 0.9 percent in the past three months according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 2.7 percent and the dollar dropped 1 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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