U.K. Gilts Advance as BOE Officials Rule Out Imminent Tightening

U.K. government bonds rose for a second day, with 10-year yields falling to a three-week low, as Bank of England officials said investors should not expect an imminent tightening of monetary policy.

Gilts climbed with German bunds and U.S. Treasuries as policy makers around the world debate the outlook for additional stimulus measures that cap borrowing costs. European Central Bank President Mario Draghi said yesterday policy makers may consider another round of longer-term refinancing operations. Britain sold 5 billion pounds ($8 billion) of inflation-linked bonds maturing in 2068 via banks today. The pound weakened against most of its 16 major peers.

“Bank of England members are reiterating their commitment to continued low rates,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “Investors are also unclear about the Fed’s intentions, weighing on risk appetite. However, if U.K. data surprises on the upside the current rally may run out of steam.”

The benchmark 10-year gilt yield fell 10 basis points, or 0.1 percentage point, to 2.81 percent at 4:19 p.m. London time after reaching 2.80 percent, the lowest level since Aug. 30. The 2.25 percent bond due in September 2023 climbed 0.835, or 8.35 pounds per 1,000-pound face amount, to 95.165.

The rate on similar-maturity U.S. notes slipped three basis points to 2.67 percent, after sliding five basis points in the previous two trading days, while German 10-year bund yields dropped seven basis points to 1.85 percent.

“No Rush”

The market’s view on unemployment is too optimistic, and it is wrong to think a tightening of policy is imminent, David Miles, a member of the Bank of England’s Monetary Policy Committee, said in a speech in Newcastle today.

BOE Deputy Governor Paul Tucker said the U.K. central bank was in “no rush” to withdraw stimulus. “The MPC’s forward guidance provides an articulated framework for a probing approach to policy, without a change in our preferences on inflation,” Tucker said in London.

Bank of England policy maker Ben Broadbent said yesterday it was right to link the U.K. central bank’s guidance on future interest rates to unemployment.

“As far as the Monetary Policy Committee is concerned, there seems to be a broad acceptance that rates won’t go up for a long time,” said Sam Hill, a U.K. fixed-income strategist at Royal Bank of Canada in London. “Miles clearly thinks productivity will increase as the recovery strengthens which implies it will take a long time to get the unemployment rate down to 7 percent.”

Pound Slides

The pound fell 0.4 percent to $1.5986 after climbing to $1.6163 on Sept. 18, the highest since Jan. 11. The U.K. currency weakened 0.3 percent to 84.39 pence per euro after appreciating to 83.53 pence on Sept. 18, the strongest level since Jan. 17.

Sterling has risen 5.6 percent in the past six months, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was little changed, while the euro gained 4.4 percent.

ECB Governing Council member Ewald Nowotny said today policy makers will debate whether additional longer-term refinancing operations were needed, while Benoit Coeure said the discussion was “open.”

Fed Bank of New York President William C. Dudley said yesterday the U.S. economy still needs support from the central bank. The Fed last week maintained its policy of buying $85 billion of debt a month to put downward pressure on borrowing costs, causing investors to push back forecasts for when the central bank would raise its benchmark interest rate.

“Long Rally”

“The pound has had a long rally recently on the back of strong U.K. data and a generally weaker dollar due to the delay of Fed tapering,” said Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich. “There is a lot of positive economic news priced into the pound. Any slight disappointment in economic data in the weeks ahead will lead to a reversal of the recent strength and a pull back towards $1.57.”

The U.K. sold index-linked gilts due in March 2068 at a real yield of 0.137 percent, the Debt Management Office said in a statement on its website. The debt office hired Barclays Plc, Deutsche Bank AG, HSBC Holdings Plc and Morgan Stanley to manage the transaction.

U.K. gilts lost 4.3 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities dropped 2.2 percent and Treasuries fell 2.8 percent.

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