Speculation making UK government Bonds sell like hot cakes

U.K. Government Bonds Soar on Speculation Central Bank May Ease With Fed


U.K. government bonds jumped on speculation that the Bank of England will ease monetary policy after the Federal Reserve said yesterday it is prepared to do more to support the economy.

Ten-year gilt yields fell the most in more than a year after the Fed signaled it may restart purchases of government debt with new money, a policy known as quantitative easing. Central bank policy makers voted 8-1 to keep rates on hold this month, and some officials said the probability the economy will need more stimulus has risen, minutes of the Sept. 9 meeting showed today. The economy will grow slower than previously forecast next year and the central bank won’t raise rates until the second quarter, the Confederation of British Industry said.

“The Bank of England and the Fed have been closely related in their policy response, so the market is now speculating as to whether they will do further quantitative easing,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “That is not my central scenario.”

The yield on the 10-year gilt fell 16 basis points to 2.96 percent as of 10:23 a.m. in London, The 4.75 percent security due March 2020 rose 1.425, or 14.25 pounds per 1,000-pound face amount, to 114.705. Two-year yields slipped 8 basis points to 0.63 percent.

The Monetary Policy Committee, led by Governor Mervyn King, overruled Andrew Sentance to keep the benchmark interest rate at 0.5 percent and the bond-purchase plan at 200 billion pounds ($313 billion). Sentance pushed for an increase in the rate to 0.75 percent, reiterating that it should be raised “gradually.”

‘Further Action’

“Most members thought that the current level of bank rate and stock of asset purchases financed by the issuance of central bank reserves remained appropriate to balance the risks,” minutes of the Sept. 9 meeting released by the central bank today in London said. “For some of those members, the probability that further action would become necessary to stimulate the economy and keep inflation on track to hit the target in the medium term had increased.”

The pound rose 0.3 percent to $1.5676 and 0.4 percent to 85.25 pence per euro.

The Fed said yesterday after its policy meeting that it’s “prepared to provide additional accommodation if needed to support the economic recovery.”

U.S. 10-year Treasury yields fell 4 basis points to 2.54 percent after plunging 14 basis points yesterday. German 10-year yields were 10 basis points lower at 2.35 percent.