Gilts Drop Amid Signs of U.S. Debt Talks, BOE Maintains Stimulus

U.K. government bonds declined for the first time in four days as Treasuries fell on optimism U.S. lawmakers will temporarily increase the nation’s debt ceiling and avert a default, damping demand for the safest assets.

The pound touched the weakest level against the euro in five weeks as the Bank of England kept its benchmark interest rate at a record-low 0.5 percent and left its bond-buying stimulus target at 375 billion pounds ($599 billion). The central bank’s Monetary Policy Committee, led by Governor Mark Carney, said in August it would keep down interest rates until unemployment, currently at 7.7 percent, falls below 7 percent.

“Gilts are following other bond markets lower as the prospect of the U.S. avoiding a technical default seems to improve,” said Peter Osler, head of interest-rate strategy at broker Marex Spectron Group Ltd. in London. “The Bank of England’s decision is in line with market expectations.”

The 10-year gilt yield increased seven basis points, or 0.07 percentage point, to 2.75 percent at 4:56 p.m. London time. The 2.25 percent bond due in September 2023 fell 0.555, or 5.55 pounds per 1,000-pound face amount, to 95.695.

Treasury 10-year note yields climbed five basis points to 2.72 percent, while the rate on German 10-year bunds rose six basis points to 1.87 percent.

Partial Shutdown

U.S. House Republican and Senate Democratic leaders are open to a short-term increase in the $16.7 trillion U.S. debt limit, according to congressional aides, who spoke on condition of anonymity. The U.S. government is entering its 10th day of a partial shutdown before its borrowing authority lapses on Oct. 17. Economists say a failure by the world’s largest borrower to repay its debt would throw economies around the world into recession.

The pound was little changed at $1.5975 after falling to $1.5914, the lowest since Sept. 18. It slid 0.8 percent versus the U.S. currency yesterday. Sterling was also little changed at 84.71 pence per euro after depreciating to 84.93 pence, the weakest level since Sept. 2.

The BOE’s decisions were predicted in two Bloomberg News surveys of economists. The pound slid 0.2 percent versus the dollar and gilts fell after the previous announcement on Sept. 5, when officials also left policy unchanged.

“This decision was not in any way a surprise,” said David Tinsley, an economist at BNP Paribas SA in London. “U.K. monetary policy settings for now are on auto-pilot, barring the U.S. debt ceiling debate getting very messy.”

Sterling Slides

Britain’s currency weakened versus all of its 16 major counterparts yesterday after a report showed U.K. industrial production slumped in August, casting doubt on the strength of the economic recovery.

Citigroup Inc.’s Economic Surprise Index for the U.K. slid to 28.1 yesterday, the lowest since July 16. The gauge, which shows whether data beat or fell short of economists’ forecasts, climbed to a nine-month high of 113.30 on Aug. 19.

The U.K. 10-year break-even rate, a market gauge of inflation expectation derived from the yield difference between gilts and index-linked securities, rose five basis points to 3.12 percentage points today. It was at 2.65 percentage points, the lowest rate for this year, in January.

Sterling declined 0.4 percent in the past week, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar rose 0.9 percent and the euro gained 0.1 percent.

The pound strengthened 5.7 percent in the past six months, making it the best performer in the period, the indexes show.

Pound Pressure

“The pound has been an outperformer among the G-10, but we believe that it has reached over-extended levels,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, wrote in an Oct. 9 note to clients, referring to the currencies of the Group-of-10 nations. “We expect the pound to come under pressure.”

Britain’s currency will decline to $1.51 in the coming year, Stannard predicted.

Carney said in an interview last month that he doesn’t see an argument for expanding the quantitative-easing program because the recovery has strengthened and minutes of the monetary policy committee’s September meeting showed all nine members agreed that the current policy setting was appropriate. Minutes of today’s meeting are due to be released on Oct. 23.

Gilts lost 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 1.7 percent and U.S. Treasuries declined 2.6 percent.

Before it's here, it's on the Bloomberg Terminal.