Gilts Advance as Demand Increases at 10-Year Debt Auction

U.K. government bonds rose for a second day after the International Monetary Fund lowered its growth forecasts for Britain’s economy, boosting demand for the relative safety of government debt.

Benchmark 10-year yields dropped to the lowest level in a week as the IMF cut its global growth projection and predicted a second year of contraction in the euro area. Gilts also advanced after Bank of England Governor Mervyn King said yesterday there was no easy route to economic recovery. The pound strengthened for the first time in six days against the euro.

The IMF downgrade has “helped to give global bonds a bit of a lift,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “The gilt market started off well this morning after King’s speech last night.”

The 10-year yield fell three basis points, or 0.03 percentage points, to 1.99 percent at 4:30 p.m. in London. It dropped to 1.98 percent, the lowest level since Jan. 16. The 1.75 percent bond maturing in September 2022 gained 0.26, or 2.60 pounds per 1,000-pound face amount, to 97.92.

The Washington-based IMF reduced its growth prediction for the U.K. economy to 1 percent for this year, from a forecast of 1.1 percent in October. The estimate for 2014 was lowered to 1.9 percent from 2.2 percent.

The global economy will expand 3.5 percent this year, less than the 3.6 percent forecast in October, the IMF said in an update of its World Economic Outlook report.

Measures Needed

Government measures to strengthen the U.K. economy are needed to underpin a “gentle recovery,” King said in a speech in Belfast delivered to the Confederation of British Industry.

“The challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis,” King said. “Recovery is inevitably slow and protracted.”

Gilts handed investors a loss of 1.5 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.3 percent and Treasuries fell 0.3 percent, the indexes show.

The pound rose from near the weakest since February versus the euro after a government report showed U.K. jobless claims unexpectedly declined, suggesting the labor market remains resilient even as the economy struggles to recover.

BOE Minutes

The U.K. currency also rallied after Bank of England minutes released today showed only one member of the Monetary Policy Committee voted against this month’s decision to pause bond purchases, or quantitative easing. Policy makers voted 8-1 to keep the bond-buying plan at 375 billion pounds, according to the minutes of the Jan. 10 meeting.

“The fact that the labor market is holding up could offer sterling some support,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. “There was some speculation a second member of the MPC could have voted for more QE this month.”

The pound strengthened 0.2 percent to 83.94 pence per euro after depreciating to 84.41 pence yesterday, the weakest level since Feb. 29. Sterling was little changed at $1.5840.

Claims for jobless benefits fell by 12,100 in December to 1.56 million, the fewest since June 2011, the Office for National Statistics said in London. Unemployment measured by International Labour Organization methods declined to 7.7 percent in the three months through November, the lowest since the quarter through April 2011.

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