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Gilts Drop on Stock Gains, Debt Supply; Pound Rises on Bernanke

U.K. 10-year government bonds fell, capping their first weekly decline in a month, amid speculation that offerings of new debt will overwhelm demand as the economy recovers and investors seek higher-yielding alternatives.

The pound rose after Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus, or so-called quantitative easing, may be warranted in the U.S. The FTSE 100 Index gained for a second week. Treasuries slumped yesterday as a sale of 30-year bonds attracted the lowest demand since February. Former Bank of England Deputy Governor Rachel Lomax signaled yesterday she would be reluctant to expand the central bank’s stimulus program given the risk of asset bubbles.

“The generally positive tone in stocks in the U.K. is still present, and that is weighing on the long end of the curve and asking questions of those who think more quantitative easing is a done deal” in Britain, said Kenneth Broux, a senior market economist at Lloyds Banking Group Plc in London. It’s also “a reaction from yesterday. The 30-year auction in the U.S. didn’t go very well.”

The 10-year gilt yield increased seven basis points to 2.95 percent as of 4:19 p.m. in London. The 4.75 percent security due in March 2020 lost 0.63, or 6.30 pounds per 1,000-pound ($1,604) face amount, to 114.64. The yield has increased from 2.88 percent a week ago.

The pound rose to its strongest level since January against the dollar after Bernanke said additional QE may be warranted. “There would appear -- all else being equal -- to be a case for further action,” he said today in the text of remarks given at a Boston Fed conference.

‘Queasy’ on Easing

The MSCI World Index posted its seventh weekly advance, while the Stoxx Europe 600 Index rose for a second week.

Further quantitative easing “makes me fairly queasy,” Lomax, the U.K. central bank’s chief of monetary policy from 2003 to 2008, told a London conference organized by HSBC Holdings Plc yesterday. “What exactly does it do? It pushes up asset prices, but how effective is it in stimulating domestic demand? We really don’t know.”

The pound gained 0.6 percent to 87.44 pence per euro, paring its fifth weekly decline to 0.2 percent. It was 0.2 percent stronger at $1.6041, after climbing to its strongest level since Jan. 29.

Extreme Policy

Sterling has fallen against the euro in the past month amid speculation a slowing recovery will prompt the Bank of England to keep its benchmark interest rate at a record low of 0.5 percent. The pound has also been driven down by concern that the central bank will add to its bond-purchase plan of 200 billion pounds just as the European Central Bank exits its own stimulus.

Britain’s currency has lost 4.8 percent in 2010 against its developed-country peers, according to Bloomberg Correlation-Weighted Currency Indexes.

The Bank of England should start withdrawing its “extreme” measures, former policy maker DeAnne Julius said in an interview with the Yorkshire Post published today.

“It is time to begin withdrawing the stimulus,” the newspaper cited her as saying. “Interest rates are very low and the deficit is very large, so it is tricky to come out of a situation of extreme policy stimulus like that. I know that people in those positions at the Bank of England are debating very actively about what needs to be done.”

The Debt Management Office is scheduled to sell 165 billion pounds of bonds in the fiscal year through March 2011. The Bank of England bought 200 billion pounds of gilts in its first asset-purchase program, equivalent to 88 percent of the 227.6 billion pounds sold in the last fiscal year.

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