Gilts Advance on Bets Central Banks to Keep Easing; Pound Falls

U.K. government bonds advanced for a third day amid bets the Federal Reserve and other central banks will maintain monetary stimulus to keep borrowing costs low.

Benchmark 10-year gilts extended their winning streak to the longest in two months as a measure of inflation expectations was near the lowest since January. The Bank of England said today that Deputy Governor Paul Tucker, who has voted against expanding the central bank’s asset-purchase plan, will leave after helping Mervyn King’s successor Mark Carney settle into his new post. The pound weakened against the dollar after advancing to a four-month high yesterday.

“There hasn’t been much domestic news, so the moves in gilts have largely been driven by U.S. Treasuries,” said Henry Skeoch, an inflation-linked strategist at Barclays Plc in London. “The cheapening in 10-year U.K. break-evens reflects the fall in headline inflation globally. Real yields have risen by more than nominal yields, reflecting selling pressures, pushing break-evens narrower.”

The yield on the 10-year gilt fell six basis points, or 0.06 percentage point, to 2.07 percent at 4:30 p.m. London time. The 1.75 percent security maturing in September 2022 rose 0.48, or 4.80 pounds per 1,000-pound ($1,569) face amount, to 97.37. The three-day advance is the longest run of gains since the period ended April 15.

Treasuries rose for a second day as speculation the Fed is about to scale back its program of asset purchases waned. U.S. policy makers next meet on June 18-19. The Wall Street Journal reported the U.S. central bank may push back on expectations of an interest-rate increase.

Break-Even Rate

The U.K. 10-year break-even rate, derived from the difference in yield between gilts and index-linked securities, was little changed at 2.92 percentage points after declining to 2.897 percentage points on June 11, the lowest level since Jan. 10. The gauge reflects expectations for consumer prices over the life of the debt.

Tucker, who has been at the Bank of England for three decades, was thwarted in his ambition to lead the institution when Chancellor of the Exchequer George Osborne opted for a foreigner as governor for the first time. Tucker voted against expanding the 375 billion-pound asset-purchase plan in the 10 meetings through May.

Gilts handed investors a loss of 1.7 percent this year through yesterday, according to the Bloomberg U.K. Sovereign Bond Index. (BRIT) Treasuries declined 1.1 percent and German bonds dropped 0.9 percent, separate indexes show.

‘Too Toppy’

The Office for National Statistics said U.K. construction volume fell 6.5 percent in April from a month earlier.

“Cable just got a bit too toppy above $1.57 so we are seeing a bit of a reversal,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London, referring to the pound-dollar exchange rate. “The pound has been a beneficiary of broad dollar weakness.”

Sterling dropped 0.2 percent to $1.5688 after climbing to $1.5738 yesterday, the highest level since Feb. 11. The U.K. currency was little changed at 85.04 pence per euro.

The pound has gained 3.9 percent in the past three months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 2.3 percent and the dollar fell 0.6 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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

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