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Gilts Rise, Pound Falls on Speculation More QE Will Be Needed

Gilts rose for the first time in seven days on speculation the central bank will need to boost asset purchases again as the U.K.’s economy worsens.

Sterling declined the most in a week versus the yen after the Guardian newspaper quoted Bank of England deputy governor Charles Bean as saying the monetary policy committee “could well decide” to expand quantitative easing again. The BOE said last week it will resume buying assets amid threats to the economy and the financial system from the debt turmoil in Europe, Britain’s biggest trading partner.

“We’re expecting that another round of QE may be necessary once the current asset purchases are done,” said Sarah Hewin, a senior economist at Standard Chartered Bank in London. “The injection of more money into the economy ought to see gilt yields being held low.”

The 10-year gilt yield declined eight basis points, or 0.08 percentage point, to 2.56 percent at 5 p.m. London time. The 3.75 percent security due September 2021 rose 0.755, or 7.55 pounds per 1,000-pound face amount, to 110.355. Thirty-year yields dropped nine basis points to 3.48 percent.

Britain’s economic outlook is worsening as the government implements its deepest public-spending cuts since World War II to reduce the nation’s fiscal deficit amid investor concern that governments around the world may be unable to repay debt.

More Stimulus

The worsening growth outlook prompted the central bank to announce an increase in the size of its bond purchases last week, expanding the program to 275 billion pounds from 200 billion pounds, the biggest increase since the first round of quantitative easing in March 2009.

Additional stimulus measures by the central bank may be announced by the spring of 2012, said Hewin.

The pound weakened 0.6 percent to 120.98 yen, after falling as much as 1.1 percent, the biggest intraday decline since Oct. 6. Sterling dropped 0.1 percent to $1.5736, and strengthened 0.3 percent to 87.30 pence per euro.

The decline came even after a report today showed the U.K. trade deficit on goods narrowed in August as exports rose to a record high.

U.K. unemployment rose to a 15-year high of 8.1 percent in the three months through August, from 7.9 percent in the quarter ended July, the Office for National Statistics said yesterday. Economic growth also slowed to 0.1 percent in the second quarter from the previous three months, the statistics office said last week, lower than the 0.2 percent previously published.

“Investors are increasingly turning bearish on sterling’s negative fundamentals,” said Valentin Marinov, a foreign-exchange strategist at Citigroup Global Markets Ltd. in London. “With further QE in the pipeline, this could be the beginning of a weakening trend in the pound.”

Gilts have returned 10 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

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