Gilts Rise as Carney Reiterates BOE Policy; Pound Little Changed

U.K. government bonds climbed as Bank of England Governor Mark Carney told lawmakers the central bank has no plan to raise interest rates until unemployment drops further.

Ten-year gilts rose for a second day even after the Debt Management Office sold 3.75 billion pounds ($5.92 billion) of the debt at the highest yield since June 2011. The central bank introduced guidance on the future path of interest rates last month and said it won’t raise them until joblessness falls to 7 percent, a scenario it said may not happen until late 2016. Data yesterday showed the jobless rate dropped to 7.7 percent in the three months to July. The pound was little changed.

“The gilt market has already priced in a lot in terms of economic recovery and rate outlook, and there is nothing that Carney said today to suggest the Monetary Policy Committee will tighten policy earlier than expected by the market,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management in London. “If anything, the risk is that we get disappointment on data because everyone is now expecting a strong recovery. Gilts should be well-supported.”

The 10-year yield dropped six basis points, or 0.06 percentage point, to 2.94 percent at 4:29 p.m. London time. The rate climbed to 3.05 percent yesterday, the highest since July 2011. The 2.25 percent bond maturing in September 2023 rose 0.53, or 5.30 pounds per 1,000-pound face amount, to 94.07. The two-year yield declined two basis points to 0.49 percent.

Gilts Sale

Gilts rose alongside German bonds after Italy’s three-year borrowing costs climbed to the highest since October at an auction. Speculation that a vote on whether to expel former premier Silvio Berlusconi from the Senate will destabilize the coalition government also weighed on Italian debt.

The recent increase in U.K. bond yields to 3 percent may be excessive and the rates may drop from here, according to HSBC Holdings Plc.

“My inclination is to think that 3 percent would already be too high,” Steven Major, global head of fixed-income Research at HSBC in London, said in an interview on Bloomberg Television’s “The Pulse” with Guy Johnson. “In a year’s time we could be back down at 2 percent.”

The Debt Management Office sold the 10-year gilt at an average yield of 2.976 percent. The U.K. last sold 10-year securities on July 2 at 2.584 percent.

No Tightening

“Until we see unemployment fall to 7 percent, we will not begin to consider tightening monetary policy,” Carney told parliament’s Treasury committee. “It’s not about time but about conditions. It’s about jobs and income growing. At that stage, we would sit down and assess policy.”

Gilts lost 5.1 percent this year through yesterday, according to Bloomberg World Bond Indexes, underperforming German securities, which dropped 2.9 percent, and a 3.8 percent decline in Treasuries.

Sterling held a four-day advance versus the dollar after Carney reiterated the Bank of England’s policy of keeping the benchmark Bank rate low until the unemployment rate declined to 7 percent. Longer-dated bond yields are rising because of the economic recovery and speculation that the Federal Reserve will soon taper its bond purchases, he said.

“Carney appears to be comfortable with the rise in long-term rates,” said Jane Foley, senior currency strategist at Rabobank International in London. “He didn’t use this opportunity to push back aggressively against recent moves in market rates.”

The U.K. currency bought $1.5819 after reaching $1.5840, the highest since Feb. 8. Sterling was at 84.16 pence per euro after appreciating to 83.83 pence yesterday, the strongest level since Jan. 23.

The implied yield on the short-sterling contract expiring in December 2014 is 0.93 percent, up from 0.68 percent on Aug. 1. The implied rate on the September 2016 contract has climbed to 2.40 percent from 1.60 percent in that period.

The pound has appreciated 7.7 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 0.8 percent and the euro advanced 3.2 percent.

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