Gilts Fall as Investors Pare Bets on BOE Stimulus; Pound Rises

U.K. government bonds fell for a third day as investors pared bets that the Bank of England will increase its asset-buying target next month, damping demand for the securities.

Ten-year yields climbed to the highest level in four weeks after minutes of the central bank’s October meeting showed policy makers were split on the need for more stimulus once their current program of so-called quantitative easing ends next month. The pound strengthened to a one-week high against the dollar after U.K. jobless claims unexpectedly fell in September and a measure of unemployment dropped to the lowest in a year.

“There are some significant differences about the best path to follow with regard to more stimulus,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There had been some expectations of them doing more and those have to be tempered,” and that is pushing down gilts, he said.

The 10-year gilt yield climbed 10 basis points, or 0.1 percentage point, to 1.92 percent at the 5 p.m. close in London, the highest since Sept. 18. The 1.75 percent bond due September 2022 fell 0.85, or 8.50 pounds per 1,000-pound ($1,618) face amount, to 98.515. The yield rose above the 200-day moving average at 1.878 percent for the first time since Sept. 18.

‘Considerable Scope’

“Some members felt that there was considerable scope for asset purchases to provide further stimulus,” according to the minutes of the Monetary Policy Committee’s Oct. 3-4 meeting published today in London.

Policy makers voted 9-0 to keep the bond-purchase target at 375 billion pounds, according to the minutes. They were also unanimous in holding the benchmark interest rate at a record low of 0.5 percent.

“The November decision is almost too tight to call,” said Robert Wood, chief U.K. economist at Berenberg Bank in London and a former Bank of England official. “The labor market release and the minutes lead us to think no change is slightly more likely than a vote for more QE in November.”

The pound appreciated 0.3 percent to $1.6166 after climbing to $1.6178, the strongest since Oct. 5. Sterling fell 0.3 percent to 81.23 pence per euro.

Jobless-benefit claims fell 4,000 from August to 1.57 million, the Office for National Statistics said in London. The jobless total measured by International Labor Organization methods declined to 7.9 percent in the quarter through August.

Pound Gains

The pound has strengthened 0.7 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro weakened 0.9 percent and the dollar dropped 1 percent.

Demand for safer assets and bond-buying by the Bank of England are keeping gilt yields low, Merrill Lynch’s Wraith said. Ten-year yields are more than 150 basis points below their five-year average of 3.42 percent.

U.K. pension managers want to raise the rate they use to calculate the value of their funds to offset the effects of the Bank of England’s bond-buying program, the National Association of Pension Funds said.

Funds that base their so-called discount rate on “artificially depressed gilt yields” resulting from the central bank’s stimulus face bigger pension deficits, the industry body, which represents 1,300 pension programs, said in a statement.

“Underlying demand from the pension fund industry is so fundamental and I don’t think that is going to change significantly,” Robert Stheeman, chief executive officer of the U.K.’s Debt Management Office, said in an interview in London. “There’s a lot of de-risking that the pension fund industry still needs to complete and that should support the market, particularly at the long end.”

Gilts returned 2.4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 2.8 percent and U.S. Treasuries earned 1.9 percent.

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