Gilts Drop Versus Dollar on BOE Minutes, Inflation

U.K. government bonds fell for a second week as Bank of England’s minutes showed all except one policy maker was against boosting debt purchases and inflation stayed at the fastest since May.

Benchmark 10-year securities slid for eighth day through Dec. 19, the longest losing streak since February 2011, as signs the euro-area debt crisis was easing, undermined demand for the relative safety of gilts. Investors boosted their expectations for inflation to the most in eight months, bond trading showed. The pound was little changed this week after rising a three-month high against the dollar.

“The minutes and inflation data suggested the chance for another round of quantitative easing is pretty low,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London, referring to the central bank’s program of asset purchases.

The yield on the 10-year gilt climbed two basis points, or 0.02 percentage point, this week to 1.89 percent at the 5 p.m. close in London yesterday. The 1.75 percent bond maturing in September 2022 dropped 0.195, or 1.95 pounds per 1,000-pound face amount, to 98.81.

Bank of England policy makers voted 8-1 to leave their bond-purchase program on hold this month as immediate dangers from the euro-area crisis receded and near-term inflation risks persisted, the minutes of the Monetary Policy Committee’s Dec. 5-6 meeting released on Dec. 19 showed. David Miles dissented and voted to increase the target by 25 billion pounds to 400 billion pounds.

‘Immediate Risks’

“The immediate risks emanating from the euro area seemed less pressing than they had in the summer, and financial-market sentiment had improved,” the MPC said. It added that inflation will probably remain above the central bank’s 2 percent target for the “next year or so.”

Consumer prices rose 2.7 percent last month from a year earlier, matching October’s level which was the fastest since May, the Office for National Statistics said Dec. 18.

The 10-year break-even rate, a measure of expectations of inflation derived from the difference in yield between gilts and index-linked securities, widened to 2.79 percentage points on Dec. 19, the most since April 19. It was at 2.71 percentage points yesterday.

The pound traded at $1.6158 at 5:15 p.m. in London yesterday after appreciating to $1.6307 on Dec. 19, the strongest level since Sept. 21. Sterling was little changed this week at 81.43 pence per euro.

Gilts returned 1.7 percent this year, compared with a 3.8 percent gain from German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries gained 1.8 percent.

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