Gilts Gain as Manufacturing Expands at Slowest Pace in 17 Months

U.K. government bonds rose after a report showed manufacturing grew at the slowest pace in 17 months, while the euro area’s economic slump curbed demand.

Sterling strengthened versus the euro before the European Central Bank announces its rate decision tomorrow amid speculation policy makers will signal they’re willing to provide more stimulus to support a faltering economy. Markit Economics’ Purchasing Managers’ Index fell to 51.6 in September from 52.2 in August, the lowest since April 2013. David Miles, one of the nine members of Bank of England’s Monetary Policy Committee, said yesterday any rate increase will be gradual.

“The U.K. economy might be growing, but recent data suggested things may have petered out a bit,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. “The euro region’s economy being where it is posts a risk on the U.K.’s. That may delay a rate increase, which will be supportive for gilts.”

The 10-year gilt yield fell six basis points, or 0.06 percentage point, to 2.37 percent as of 4:23 p.m. London time. The 2.75 percent bond due September 2014 increased 0.505, or 5.05 pound per 1,000-pound ($1,620) face amount, to 103.355. Two-year rates dropped three basis points to 0.8 percent.

U.K. government bonds gained 7.5 percent this year through yesterday, according to Bloomberg World Bond Indexes. Germany’s returned 7.3 percent and Treasuries rose 3.8 percent.

Britain’s manufacturing expanded at a slower pace in September as growth in new orders dropped to a 19-month low of 50.5, close to the 50 level that divides expansion from contraction. The export orders index also slid. The data may undermine arguments that the U.K. economy can sustain growth with higher interest rates.

Miles’ Comment

“Now the MPC is giving some qualitative judgments on most likely outcomes –- saying that interest-rate rises are expected to be gradual and probably to a level lower than had been seen as normal pre-crisis,” Miles said in a speech at the London School of Economics. “That says something substantive; and most people can understand it.”

The pound strengthened 0.2 percent to 77.77 pence per euro. It slipped 0.1 percent to $1.6193, and had weakened by as much as 0.3 percent to $1.6162 earlier.

“The pound will continue to trade on the back foot against the dollar mainly because U.K. data is starting to top out and as the dollar is trading with a stronger tone coming into the fourth quarter,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “I would not be surprised to see the pound trading toward $1.60.”

Sterling gained 1.6 percent against its nine developed-nation peers in the past month, the best performer after the U.S. dollar, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies.

The Debt Management Office today sold 4 billion pounds of bonds due in 2020 at an average yield of 1.933 percent, compared with 1.939 percent at the previous sale on Sept. 2. The auction drew bids 1.5 times the amount of securities on offer.

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