U.K. Gilts Slide After BOE Holds QE, Rates; Pound Gains

U.K. gilts fell, with 10-year yields rising the most in almost eight weeks, after the Bank of England halted its bond-purchase program amid the threat of inflation.

Ten-year bonds snapped a seven-day gain as the Monetary Policy Committee held its quantitative-easing target at 325 billion pounds ($525 billion). Eight of 51 economists surveyed by Bloomberg before the decision predicted an increase of at least 25 billion pounds. Sterling strengthened after the announcement. Ten-year gilt yields dropped to a record yesterday as signs the European debt crisis is worsening spurred demand for safety.

“Gilts sold off as the market was a little disappointed the BOE didn’t deliver more QE,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “There was maybe a 20 or 25 percent chance of more QE being priced into the market. We’d been driven to record yield lows by the European situation, so there was that much greater scope for gilts to react.”

The 10-year yield rose nine basis points, or 0.09 percentage point, to 2.01 percent at 4:01 p.m. London time after gaining as much as 11 basis points, the biggest increase since March 16. The 4 percent bond due in March 2022 fell 0.875, or 8.75 pounds per 1,000-pound face amount, to 117.825. The yield dropped to 1.881 percent yesterday, the lowest since Bloomberg began compiling the data in 1989.

Double Dip

The nine-member MPC led by Governor Mervyn King left its benchmark interest rate at a record-low 0.5 percent today, where it has been since March 2009.

With the U.K. suffering its first double-dip recession since 1975, officials had to balance the need to bolster the economy with the threat of inflation, which has been above their 2 percent target for more than two years. The MPC made its decision with new quarterly economic forecasts that will be published next week.

Minutes of today’s decision will be published on May 23 and may reveal a split among policy makers. David Miles, the only MPC member to vote for more stimulus last month, has since said that decision looks vindicated, while Martin Weale said data showing the U.K. slipped back into recession strengthened the argument for more QE.

Data last week showed manufacturing and services weakened in April after the economy shrank 0.2 percent in the first quarter. Factory output increased 0.9 percent in March after falling a revised 1.1 percent the previous month, the Office for National Statistics said today.

Annual Return

Gilts have returned 0.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They surged 17 percent in 2011 as the European debt crisis worsened.

The pound appreciated 0.2 percent to $1.6152 after falling as much as 0.2 percent. The U.K. currency was little changed at 80.18 pence per euro. It earlier advanced to 80.01 pence, the strongest level since November 2008.

“There was a little relief among pound bulls that they didn’t do QE,” said Daragh Maher, a currency strategist at HSBC Holdings Plc in London. “The reaction is proving small. Still, it removes one downside event risk to the pound, and may encourage some to test the downside in euro-sterling for that elusive break of 80 pence per euro.”

A bullish position is a bet an asset will rise.

The pound has appreciated 4.8 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2 percent, and the euro fell 0.1 percent.

Demand for U.K. government bonds this week pushed the difference between two- and 10-year yields to the narrowest in more than three years.

The spread was at 156 basis points today after shrinking to 150 basis points yesterday, the least since January 2009, according to data compiled by Bloomberg based on closing prices.

The spread may encounter resistance at its January 2009 low at 131 basis points, and may find support at the 100-day moving average at 171 basis points, the data show.

Resistance refers to an area on a yield chart where analysts expect orders to sell a security to be grouped. Support is an area where they anticipate buy orders may be clustered.

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