Gilts Advance on Speculation BOE Will Boost Asset Buying

U.K. government bonds advanced, with 10-year yields dropping the most this year, amid speculation the Bank of England will increase its asset-purchase program as the economy stalls.

The pound climbed from a 15-month low against the euro and German bunds advanced after a report showed services and manufacturing in the 17-nation region shrank in February, boosting demand for safer assets. Sterling earlier fell to the weakest since July 2010 against the dollar after the Federal Reserve signaled it may slow the pace of its bond-buying program, while more Bank of England policy makers voted this month to boost stimulus. The U.K. auctioned 10-year gilts.

“The risk of price-insensitive central-bank buying is more of a factor than it was before the minutes,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “A lot of the move is to do with bunds being up as well, which are catching up on the risk-off tone.”

The 10-year gilt yield fell nine basis points, or 0.09 percentage point, to 2.11 percent as of 4:14 p.m. London time, after dropping as much as 10 basis points, the most since Nov. 28. The 1.75 percent bond due September 2022 rose 0.72, or 7.20 pounds per 1,000-pound ($1,526) face amount, to 96.925.

The rate on similar-maturity German bunds dropped seven basis points to 1.58 percent.

BOE Minutes

Bank of England Governor Mervyn King and Paul Fisher joined David Miles in voting to increase the target for bond purchases by 25 billion pounds to 400 billion pounds, minutes of the central bank’s Feb. 7 meeting released yesterday showed. They were outvoted by the remaining six members of the Monetary Policy Committee.

The Debt Management Office sold an additional 2.25 billion pounds of benchmark 10-year gilts at an average yield of 2.147 percent, the highest since May. The U.K. last sold 10-year bonds on Jan. 22 at an average yield of 1.897 percent.

The pound slumped 1.2 percent against the dollar yesterday as minutes of the Fed’s January meeting released showed several participants said the central bank should be “prepared to vary the pace of asset purchases,” known as quantitative easing.

“The pound was underperforming anyway due to the recent BOE alarm bells,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There are pound-specific sell forces in play in the form of verbal intervention, potential rate cuts and further QE, and the Fed added fuel to the fire. A move to $1.50 is our current target.”

Pound’s Slide

The pound gained 0.2 percent to $1.5261 after sliding to $1.5132, the lowest since July 21, 2010. The U.K. currency strengthened 0.6 percent to 86.68 pence per euro. It weakened to 87.65 pence yesterday, the weakest since October 2011.

The pound may extend its decline against the dollar after breaking through a key level of so-called support, Credit Suisse AG said, citing trading patterns.

The U.K. currency may fall toward $1.4856, the 61.8 percent Fibonacci retracement of its advance between January and August 2009, after breaching $1.5274, the 50 percent retracement, Cilline Bain, a technical analyst at Credit Suisse in London, wrote in an e-mailed report to clients.

“We will continue to slide lower,” Bain said in a telephone interview, confirming the contents of the report. “The next significant target is $1.4856.” Support refers to an area where buy orders may be clustered.

The pound has slumped 5.1 percent this year, the second-worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. Only the yen has weakened more, losing 5.7 percent.

U.K. government bonds handed investors a loss of 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.7 percent and Treasuries fell 0.9 percent.

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