U.K. Gilts Fall for Second Day as Stocks Gain; Pound Declines

U.K. gilts declined for a second day as stocks rallied and investors sought higher returns than offered by bond yields near record lows.

Two-year rates climbed to the highest in a week as speculation waned that the Bank of England would increase its asset-purchase program at a policy meeting tomorrow. The pound dropped against the euro after as a report showed U.K. house prices slipped last month more than economists forecast.

“While people think there’s a reasonable chance of there being more quantitative easing being announced, I don’t think many expect that to be the case tomorrow -- it’s too early,” said said Adam McCormack, head of gilt sales at Barclays Plc in London. Improved sentiment toward stocks “does have an effect as well.”

The yield on the 10-year gilt climbed five basis points to 2.34 percent at 4:36 p.m. in London, after dropping to a record 2.24 percent on Aug. 18. The 3.75 percent bond due September 2020 fell 0.400, or 4 pounds per 1,000-pound ($1,595) face amount, to 111.385. Two-year yields were little changed at 0.58 percent, after increasing to 0.64 percent today, the highest since Aug. 30.

The pound slid 0.4 percent to 88.18 pence per euro and was little changed at $1.5938. The FTSE 100 Index of equities rose 3.1 percent, extending yesterday’s 1.1 percent gain.

Pound Gains

Britain’s five-year program to eliminate the budget deficit has provided space for the central bank to practice “monetary activism” to keep borrowing costs down, Chancellor of the Exchequer George Osborne said yesterday. The U.K. has “a plan for fiscal responsibility” that was introduced “so that monetary activism can allow interest rates to stay lower for longer,” he said in London.

Goldman Sachs Group Inc. and Citigroup Inc. said two days ago that U.K. policy makers may resume their quantitative easing program by buying bonds as early as this week.

Gilts have returned 9.8 percent this year, compared with 7.4 percent from German debt and 8.4 percent from U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The pound weakened for a second day against the euro even as Halifax said U.K. house prices fell in August.

Prices dropped 1.2 percent from July, the mortgage unit of Lloyds Banking Group Plc said in London. From a year earlier, they decreased 3.9 percent.

“Sterling will remain fragile for the foreseeable future,” said Harry Adams, a currency trader at Schneider Foreign Exchange in London. “Any negative data, such as this morning, will increase speculation of further quantitative easing, which will result in sterling coming down even further.”

The pound has depreciated 7 percent in the past 12 months against a basket of nine major peers, making it the second-worst performer after the dollar, according to Bloomberg Correlation-Weighted Currency Indexes.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE