Gilts Fall Third Week as BOE Holds Stimulus Amid Growth Signs

U.K. 10-year gilts dropped for a third week, the longest losing streak since June, as the Bank of England refrained from boosting monetary stimulus and reports added to signs Britain’s recovery is gaining momentum.

Two-year yields rose the most in two months as industrial production increased more than economists forecast in March and an industry report estimated Britain’s growth accelerated in the first quarter. Gilts also dropped as stock gains damped demand for the relative safety of government debt. The pound weakened the most in two months against the dollar.

“Industrial production surprised to the upside, adding to evidence that the U.K. economy is finally exiting a recession,” said Nick Stamenkovic, a strategist at RIA Capital Markets Ltd. in Edinburgh. “We’ve seen a very sharp response in equity markets and that’s undermined gilts. On top of that, there’s a growing realization that the Bank of England is not in a rush to increase quantitative easing.”

The U.K. 10-year yield climbed 17 basis points, or 0.17 percentage point, this week to 1.89 percent, completing the longest run of weekly gains since the period ended June 29. The 1.75 percent bond due in September 2022 fell 1.405, or 14.05 pounds per 1,000-pound ($1,534) face amount, to 98.805.

The two-year yield climbed five basis points to 0.33 percent, the biggest increase since the week ended March 8

The Bank of England’s nine-member Monetary Policy Committee kept its target for asset purchases at 375 billion pounds on May 9, as forecast by all except one of 44 economists in a Bloomberg News survey. The decision followed Governor Mervyn King’s second-last meeting before he is replaced by Bank of Canada chief Mark Carney on July 1.

Production Expands

Industrial production rose 0.7 percent from February, when it gained 0.9 percent, the Office for National Statistics said on May 9. The median forecast of economists surveyed by Bloomberg was for a gain of 0.2 percent. U.K. gross domestic product expanded 0.8 percent in the quarter through April, compared with growth of 0.3 percent in the three months ended March 31, the National Institute of Economic and Social Research said in an estimate the same day.

Gilts handed investors a loss of 0.9 percent this month through May 9, trimming gains this year to 0.8 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The pound declined 1.5 percent this week to $1.5339 at 5:07 p.m. in London yesterday, the biggest drop since the period ended Feb. 22. The U.K. currency weakened 0.3 percent to 84.53 pence per euro.

Sterling has depreciated 2.6 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar rose 3.9 percent and the euro gained 1.9 percent.

The U.K. will sell 4.75 billion pounds of five-year gilts on May 14 and 2.5 billion pounds of 30-year bonds on May 16.

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

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

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