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U.K. 10-Year Gilts Drop a Second Day as Services Expand

U.K. government bonds declined for a second day after a report showed services expanded in February at a faster pace than analysts forecast, damping speculation the Bank of England will add more stimulus.

Sterling appreciated to the strongest level in a week versus the euro before the central bank announces on March 7 whether it will increase asset purchases, known as quantitative easing, to boost growth. Bank of England policy makers begin their monthly rates-setting meeting tomorrow after minutes released Feb. 20 showed they split on the need to expand stimulus last month. The yield on 10-year gilts dropped 24 basis points last week, the most since the period ended Nov. 4, 2011.

“The lack of weak data today shows that’s more QE isn’t nailed on,” said Simon Peck, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “Some of last week’s outperformance in gilts is being retraced. The market is coming round to the realization that perhaps there was more signaling value in the minutes, rather than there being an active intention of further QE any time soon.”

The benchmark 10-year gilt yield added six basis points, or 0.06 percentage point, to 1.97 percent as of 4:24 p.m. London time, set for the biggest one-day increase since Feb. 13. The 1.75 percent bond maturing in September 2022 fell 0.5, or 5 pounds per 1,000-pound ($1,511) face amount, to 98.145.

Gilts Auction

The U.K. sold 4 billion pounds of 1.25 percent securities maturing in July 2018 at an average yield of 1.04 percent, compared to 1.28 percent at a previous sale on Feb. 14. Investors bid for 2.17 times the amount of bonds allotted. The five-year gilt yield rose three basis points to 0.87 percent.

A gauge of services activity was at 51.8, from 51.5 in January, above the 50 level that indicates expansion. The median of 29 analyst forecasts in a Bloomberg News survey was for a reading of 51.

“There have been instances in the past where this survey has been important enough to change the Bank of England’s thinking at the last moment,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London. “Our view is there is no more easing coming this week. Sterling looks oversold.”

The pound was little changed at 86.15 pence per euro, after appreciating 0.3 percent to 85.89 pence, the strongest since Feb. 26. Sterling was little changed at $1.5111.

The nine-member Monetary Policy Committee will leave its asset-purchase target at 375 billion pounds, according to the median of 39 estimates in a Bloomberg News survey of economists. Eleven banks are predicting an expansion of stimulus.

King Outvoted

Outgoing Governor Mervyn King, along with two other policy makers, was last month defeated in a push for more asset purchases according to minutes of the bank’s Feb. 7 meeting.

Retail sales at stores open at least 12 months, measured by value, increased 2.7 percent in February from a year earlier, the British Retail Consortium said in an e-mailed report today. Excluding distortions caused by the timing of the Easter holidays, that’s the biggest increase since December 2009.

The pound has depreciated 5.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.7 percent and the euro rose 1.2 percent.

U.K. gilts have lost 0.5 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 0.3 percent and Treasuries fell 0.2 percent.

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