U.K. government bonds rose for the first time in five days and the pound declined after Bank of England policy maker David Miles said the economy remained weak and renewed his call for more asset purchases.
Benchmark 10-year yields slid the most in three months after BOE Governor Mervyn King said yesterday tighter monetary policy is still some way off. The pound fell to a three-week low against the dollar as Chancellor of the Exchequer George Osborne said the U.K. has to continue to make savings. Gilts extended their advance after data showed the U.S. economy expanded less than previously estimated in the first quarter.
“There are signs of stabilization, markets are trying to form a base,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Central bankers are keen to talk rates down again. It’s way too premature for the U.K. recovery to be confronted with tighter monetary conditions.”
The 10-year yield fell nine basis points, or 0.09 percentage point, to 2.44 percent at 4:21 p.m. in London. That’s the biggest decline since March 1. The 1.75 percent gilt due in September 2022 rose 0.745, or 7.45 pounds per 1,000-pound ($1,533) face amount, to 94.315. The rate on two-year gilts dropped 11 basis points to 0.41 percent.
Miles, who has voted for additional quantitative easing at each Bank of England meeting since November, said any unwinding of stimulus in the future should be done “very gradually.”
“I do not think we should be in any hurry in the U.K. to move the monetary policy dials back to more normal settings,” Miles said in a speech in London. “Indeed it might well be right for the next move in the U.K. to push them even further to give more support to demand.”
Benchmark U.K. yields jumped 35 basis points last week, the most since January 2009, after Federal Reserve President Ben S. Bernanke signaled the U.S. central bank may start reducing its asset-purchase program this year if economic growth is in line with central-bank projections.
U.S. gross domestic product grew at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department reported.
The Bank of England’s benchmark interest rate has been at a record-low 0.5 percent since March 2009 and the central bank has bought 375 billion pounds of government bonds since then.
“The outlook for financial stability is still clouded by risks from a weak and uneven global recovery and imbalances in the euro area,” the central bank said in its Financial Stability Report released today. “Risks could crystallize if global long-term interest rates were to rise abruptly from currently still historically low levels or if credit spreads were to widen.”
Gilts handed investors a loss of 4.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.1 percent and Treasuries fell 3 percent.
The pound fell against all except two of its 16 major counterparts as Osborne outlined the spending cuts the government will make in 2015.
“We have to deal with the world as it is, not as we wish it to be, so this country has to continue to make savings,” he told lawmakers in London. “We’ve made real progress, putting right what went so badly wrong but while we’ve been acting, the challenges from abroad have grown.”
The pound fell 0.6 percent to $1.5327 after sliding to $1.5315, the weakest level since June 5. The U.K. currency was little changed at 84.75 pence per euro.
Sterling has declined 0.7 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-market currencies. The euro gained 4.2 percent and the dollar appreciated 6 percent.