Gilt Yield Reaches Two-Year High After Fed Minutes; Pound Falls

U.K. 10-year gilt yields rose to the highest level since August 2011 after Federal Reserve minutes showed policy makers voiced support for slowing debt purchases this year, damping demand for fixed-income securities.

Benchmark gilts fell at the start of trading after Treasuries slid yesterday when the Fed minutes showed officials supported Chairman Ben S. Bernanke’s plan to taper their monthly $85-billion debt purchases this year. The extra yield of 30-year gilts over 10-year securities shrank for a second day. The pound weakened after Bank of England policy maker Martin Weale said the central bank may need to extend its 375-billion pound ($584 billion) bond-buying program.

“The market’s open is all about the Fed minutes,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Treasury yields have moved up significantly in the last session and that’s what’s driving gilt yields higher.”

The U.K. 10-year yield was little changed at 2.74 percent at 1:58 p.m. London time after climbing to 2.76 percent, the highest level since Aug. 8, 2011. The price of the 1.75 percent bond maturing in September 2022 was 92.345.

The Fed’s debate over when to taper its monthly bond purchases has roiled financial markets around the world and sparked a selloff in fixed-income assets. Gilts lost investors 4.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries fell 3.9 percent and German bonds dropped 2.3 percent.

Fed Minutes

“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the minutes of the Fed’s July 30-31 gathering released in Washington.

The spread between 30- and 10-year gilts shrank three basis points to 92 basis points after contracting to 92 basis points, the narrowest since December 2011. The difference was 126 basis points as recently as July 19.

The lower yields on longer-dated gilts reflect persisting demand from institutional investors, said Sam Hill, U.K. fixed-income strategist at Royal Bank of Canada in London. “At some point, the relative value between sectors will become too compelling to avoid, but for the time being we are reluctant to call time on the relative strength of the long-end,” he said.

Pound Weakens

The pound weakened for a second day against the dollar after Weale said in an interview with the Daily Telegraph that there may be circumstances where it “would be sensible to undertake further asset purchases.”

Those circumstances may include further shocks in the euro area or more turmoil in emerging markets, he said.

Euro-area services expanded in August for the first time in 19 months, according to a report released today by London-based Markit Economics based on a survey of purchasing managers.

“Weale’s comments have put sterling back under some massive pressure,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “In light of the moves we’ve seen following the Fed minutes and in reaction to the stronger-than-expected PMI figures in Europe, we look for sterling to be the underperformer today.”

The pound dropped 0.4 percent to $1.5598 after advancing to $1.5718 yesterday, the strongest level since June 18. The U.K. currency weakened 0.3 percent to 85.51 pence per euro.

“We would view these as corrections given recent gains rather than anything more serious and we remain positive on the pound,” Elsa Lignos, senior currency strategist at the Royal Bank of Canada in London, wrote in a note to clients, in reference to the impact of Weale’s comments.

A government report tomorrow will show U.K. gross domestic product increased 0.6 percent in the second quarter, in line with an earlier reading released on July 25, according to a Bloomberg survey of economists.

The pound has gained 6.4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.3 percent and the dollar strengthened 3.2 percent.

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