Gilt Yields Fall Most in 11 Months Before Carney; Pound Weakens
U.K. government bonds rose, pushing 10-year yields down the most in 11 months, amid speculation Bank of England Governor Mark Carney will use a speech tomorrow to affirm his intention to keep interest rates at a record low.
Two-year gilt yields dropped the most since June after Deputy Governor Charlie Bean said in an interview late last week that policy makers are sending a “clear signal” that they won’t increase interest rates anytime soon. U.K. financial markets were shut for a holiday yesterday when Treasuries rallied after a report showed U.S. durable-goods orders slid by the most in almost a year. The pound weakened against most of its 16 major counterparts.
“We’re partly playing catch up from yesterday,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “Carney’s clearly put a lot of credibility on the line by introducing forward guidance this early and against the improvement in the data so he’s going to want to reinforce the message. We’re comfortable with the move we’re seeing and think it can go further at the front end particularly.”
The benchmark 10-year yield fell 12 basis points, or 0.12 percentage point, from yesterday to 2.60 percent at 4:06 p.m. London time. That’s the biggest one-day decline since Sept. 26, 2012. The 1.75 percent gilt due in September 2022 rose 0.895, or 8.95 pounds per 1,000-pound ($1,554) face amount, to 93.20.
The two-year yield dropped six basis points to 0.40 percent, the steepest drop since June 26.
Carney’s speech in Nottingham, England, will be his first policy address since announcing Aug. 7 that officials wouldn’t consider raising rates before unemployment fell to 7 percent as long as price and financial stability weren’t jeopardized. The 10-year gilt yield climbed to 2.76 percent on Aug. 22, the highest level since August 2011.
The Bank of England governor has sought to underpin the recovery by introducing interest-rate guidance to damp speculation that borrowing costs will rise. Policy makers left the official bank rate at 0.5 percent and maintained the central bank’s asset-purchase target, known a quantitative easing, at 375 billion pounds at their most recent meeting ended Aug. 1.
The central bank is “communicating not just to market participants, but to people, to households and businesses, to give them a clear signal that interest rates are not likely to rise imminently,” Bean said in an Aug. 23 interview in Jackson Hole, Wyoming.
Treasury yields dropped from an almost two-year high yesterday after the U.S. Commerce Department said durable goods orders fell 7.3 percent, the biggest drop since August 2012. The Treasury 10-year yield declined three basis points to 2.75 percent today after sliding three basis points yesterday.
“Given the likelihood that Mr. Carney puts up a fight against recent market moves, gilts look the best of the major government bond markets to open bullish trades after the weaker U.S. data,” Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a note to clients.
Short-sterling futures advanced, indicating investors are reducing their bets on higher interest rates. The implied yield on the contract expiring in December 2014 fell four basis points to 0.88 percent.
The additional yield investors demand to hold 10-year gilts over their two-year counterparts shrank five basis points to 220 basis points, the narrowest since Aug. 15.
Gilts lost investors 4.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.4 percent and Treasuries declined 3.4 percent.
The pound dropped 0.2 percent to $1.5543 after declining to $1.5482, the lowest level since Aug. 14. Sterling fell 0.4 percent to 86.17 pence per euro after depreciating to 86.23 pence, the weakest since Aug. 7.
Options traders have become more bearish on the pound this month, so-called 25-delta risk reversals show. The premium for three-month options granting the right to sell the pound versus the dollar relative to those allowing for purchases was at 1.53 percentage points, from 1.34 on July 31 and 0.53 at the end of last year, data compiled by Bloomberg show.
“Citi economists expect the governor to highlight that QE may be used again to counter a sustained increase in gilt yields,” Valentin Marinov, head of European, Group-of-10 currency strategy at Citigroup Inc. in London, wrote in an e-mailed report. “The speech could weigh on sterling and support euro-sterling.”
The pound has strengthened 5.4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.7 percent and the dollar climbed 2.5 percent.
Volatility on gilts was the highest in developed markets today, followed by those of Denmark and Israel, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
To contact the reporter on this story: Lucy Meakin in London at firstname.lastname@example.org