Gilts Climb Third Day as Fed Officials Seek to Limit Yield Jump

U.K. government bonds rose for a third day after Federal Reserve officials intensified their efforts to limit an increase in U.S. long-term interest rates, boosting the appeal of fixed-income assets.

Benchmark 10-year gilts headed for a weekly advance after a British report yesterday showed gross domestic product shrank more than previously estimated from its peak in 2008 to the depths of the recession. U.K. government securities still headed for their worst quarter in five years amid concern central banks around the world will curtail stimulus. The pound weakened against the euro and the dollar before the Bank of England’s monetary policy decision next week.

“Gilts have come back at bit, driven by the soothing comments from several Fed speakers,” said Simon Peck, a rates strategist at Royal Bank of Scotland Group Plc in London. “The market is still very worried that the Fed has embarked on a regime change. If we get weakness in data, it will back up the soothing words. There are risks toward a further rally.”

The 10-year gilt yield fell three basis points, or 0.03 percentage point, to 2.40 percent at 12:54 p.m. London time, having dropped two basis points this week. The 1.75 percent security due in September 2022 rose 0.25, or 2.50 pounds per 1,000-pound ($1,525) face amount, to 94.69.

The yield has still increased 63 basis points this quarter, the most since the three months ended June 2008.

Fed Purchases

Any decision to reduce the pace of asset purchases wouldn’t represent a withdrawal of stimulus, William C. Dudley, president of the Fed Bank of New York, said yesterday. Bond purchases may be prolonged if economic performance fails to meet the Fed’s forecasts, he said.

Gilts rose even as U.K. reports today showed consumer confidence climbed to the highest level in more than two years and house prices increased.

U.K. government securities handed investors a loss of 3.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.7 percent and Treasuries declined 2.4 percent, the indexes show.

Former Bank of Canada Governor Mark Carney replaces Mervyn King as governor of the Bank of England on July 1, and the London-based central bank’s nine-member Monetary Policy Committee announces its decision on July 4.

Policy makers will maintain the asset-purchase target unchanged at 375 billion pounds and keep the benchmark interest rate at a record-low 0.5 percent at the meeting, according to Bloomberg surveys of economists.

Bank of England policy maker David Miles said on June 26 that growth in the U.K. remains “pretty weak and anemic” as he renewed his call for more asset purchases.

U.K. ‘Overshot’

“As many MPC members have been keen to tell us in the last couple of weeks, the U.K. economy is not in the same place as the U.S.,” Michael Amey, a money manager at Pacific Investment Management Co. in London said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson. “The U.K. has overshot and rate hikes here are a long way off.”

The pound depreciated 0.3 percent to 85.73 pence per euro, extending this week’s decline to 0.7 percent. Sterling fell 0.l percent to $1.5245 after sliding to $1.5202 yesterday, the lowest level since June 3.

The pound has dropped 1.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 5 percent and the dollar climbed 6.1 percent.

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