Gilts Advance for a Fifth Day on Stimulus Optimism; Pound Drops

U.K. 10-year government bonds advanced for a fifth day, the longest streak of gains since March, amid speculation that central banks from the U.K. to the U.S. will maintain policy stimulus.

Two-year gilts stayed higher after a report showed construction output contracted more than economists forecast. The pound dropped versus the dollar, paring its biggest weekly gain in a month, before the Bank of England publishes the minutes of its most recent meeting next week, which will reveal how policy makers voted at new Governor Mark Carney’s first meeting. Federal Reserve Chairman Ben S. Bernanke said this week the U.S. economy still needed stimulus.

“Gilts are underpinned by a view that liquidity will remain ample after what Bernanke said this week brought a bit of balance to the market,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “People are buying after a big backup in yields last month was seen as excessive. The economic outlook in the U.K. has improved, but perhaps not enough to warrant that kind of selloff.”

The benchmark 10-year gilt yield fell seven basis points, or 0.07 percentage point, to 2.31 percent at 4:15 p.m. London time, the lowest since June 20. The 1.75 percent bond maturing in September 2022 rose 0.53, or 5.30 pounds per 1,000-pound ($1,510) face amount, to 95.38. The rate has dropped 17 basis points this week, the steepest decline since the period ended March 1.

Two-year gilt yields slipped two basis points to 0.35 percent.

Debt Supply

Gilts handed investors a loss of 3.9 percent in the past three months through yesterday, according to Bloomberg World Bond Indexes. German bonds declined 1.4 percent and Treasuries fell 3 percent, the indexes show.

Gilts rose alongside German bonds as investors sought safety amid concern a political dispute in Portugal will result in new elections and endanger the nation’s financial-aid program.

President Anibal Cavaco Silva said on July 9 that early elections were undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact allowing Portugal to complete its aid program.

U.K. bond gains were underpinned by a lack of debt supply in the coming few weeks. The next auction for regular gilts will be on Aug. 6, according to data from the Debt Management Office.

Construction Data

The pound slipped 0.4 percent to $1.5117 after declining to $1.4814 on July 9, the lowest level since June 2010. It has gained 1.5 percent this week, the most since the period ended June 7. Sterling was little changed at 86.36 pence per euro.

The pound has weakened 2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 6.3 percent and the euro gained 5 percent.

U.K. construction output contracted 3.4 percent in May from a year earlier. The median estimate of seven economists in a Bloomberg News survey was for a 2.8 percent decline.

Futures traders increased bets the pound will weaken against the dollar, according to the latest data from the Washington-based Commodity Futures Trading Commission.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain totaled 31,324 contracts on July 2, compared with so-called net shorts of 19,429 a week earlier. The difference was as much as 77,738 on June 7.

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