U.K. 30-year government bonds rose for the first time in three weeks on speculation the Bank of England will expand its bond-buying program and focus purchases on longer-maturity debt.
Ten-year gilts outperformed German bunds after minutes released on June 20 showed Governor Mervyn King and three other policy makers pushed to expand the so-called quantitative easing program at their meeting this month, and were overruled 5-4 in a vote. Sterling fell against the dollar on concern increased asset purchases will debase the currency.
“I think the Bank of England will have to buy more long-dated gilts than it did in the last round of quantitative easing,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “Strong hints from the bank that more QE is coming underpins the outlook for gilts.”
Thirty-year gilts advanced, pushing yields down 13 basis points, or 0.13 percentage point, from last week to 2.96 percent at 5 p.m. London time yesterday. The price of the 4.5 percent security maturing in December 2042 rose 3.025, or 30.25 pounds per 1,000-pound ($1,558) face amount to 130.655.
The extra yield investors demand for holding 10-year gilts instead of similar-maturity German bunds narrowed to 14 basis points, the lowest on a closing-market basis since Jan. 4, from 23 basis points last week.
RBC forecasts the Bank of England will increase the size of the asset-purchase program by 75 billion pounds, to 400 billion pounds, next month.
Longer-maturity gilts may extend gains next week, as a report on June 28 will show the U.K. economy contracted 0.3 percent in the first three months of this year, according to analysts surveyed by Bloomberg News.
The pound fell 0.9 percent to $1.5581 this week and was little changed at 80.5 pence per euro.
Sterling slid 1.7 percent in the past month, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar fell 0.4 percent and the euro dropped 1.6 percent.
Gilts have returned 2.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies as of June 21. German bunds rose 2.6 percent, and U.S. Treasuries gained 1.9 percent.