U.K. Gilts Decline on Concern Bank of England May Delay Stimulus

U.K. government bonds fell, pushing 10-year yields to the highest in a month, amid speculation the Bank of England will delay adding more stimulus to the economy.

Two-year gilt yields reached a three-week high after the nation sold 1.5 billion pounds ($2.3 billion) of 5 percent securities maturing in 2014 at a so-called mini-tender. The U.K. trade deficit widened to a record in the second quarter, data showed today. Bank of England Governor Mervyn King said yesterday policy makers thought cutting the U.K.’s benchmark rate would be counterproductive as the London-based central bank lowered its growth forecasts.

“The market had been expecting something more dovish from King yesterday so gilts are repricing and are a bit lower,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “The market was overly optimistic about what extra stimulus the central bank might provide. The mini-tender went well, there was a little bit of a concession and it wasn’t a big size.”

The U.K. 10-year yield climbed five basis points, or 0.05 percentage point, to 1.62 percent at 4:47 p.m. London time, after touching 1.63 percent, the highest level since July 6. The 4 percent bond maturing March 2022 fell 0.5, or 5 pounds per 1,000-pound face amount, to 121.065.

Asset purchases, known as quantitative easing, remain the central bank’s main stimulus instrument, King told reporters in London yesterday. Policy makers concluded a rate cut “would be more counterproductive than beneficial,” he said. The central bank maintained its bond-buying program at 375 billion pounds on Aug. 2.

Easing Prospects

“The prospects for more easing have gone down,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London. “The market is still expecting more QE but its not the slam dunk that it was. We will see yields drifting higher.”

Two-year gilt yields climbed two basis points to 0.14 percent after reaching 0.16 percent, the most since July 19.

The U.K. goods-trade gap increased to 28.3 billion pounds from 25 billion pounds in the first quarter, the Office for National Statistics said today in London. Exports fell 4.9 percent, while imports slipped 0.5 percent. In June, the deficit widened more than economists forecast to 10.1 billion pounds.

The pound gained 0.5 percent to 78.61 pence per euro. The U.K. currency declined 0.3 percent to $1.5614.

“Mervyn King talked down the U.K. economy yesterday, which won’t help the pound,” said Lee McDarby, head of dealing on the corporate and institutional treasury desk at Investec Bank Plc in London. “Sterling will gradually drift lower.”

Sterling has appreciated 1.8 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 3.3 percent and the yen gained 1.9 percent.

Gilts have returned 3.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 3.3 percent and U.S. Treasuries rose 1.9 percent.

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