BLBG:Gilt Yields Drop Most in Five Months Before Carney; Pound Slides
U.K. government bonds rose, pushing 10-year yields down the most in five months, amid speculation Bank of England Governor Mark Carney will use a speech tomorrow to affirm his intention to keep interest rates a record low.
Two-year gilt yields dropped the most since June after Deputy Governor Charlie Bean said in an Aug. 23 interview in Jackson Hole, Wyoming, that policy makers are sending a “clear signal” they won’t increase interest rates anytime soon. The pound weakened against most of its 16 major peers. Financial markets in the U.K. were closed yesterday for a public holiday when Treasuries rallied after a report showed U.S. durable-goods orders declined by the most in almost a year.
“We’re partly playing catch up from yesterday,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “Carney’s clearly put a lot of credibility on the line by introducing forward guidance this early and against the improvement in the data so he’s going to want to reinforce the message. We’re comfortable with the move we’re seeing and think it can go further at the front end particularly.”
The 10-year gilt yield dropped 11 basis points, or 0.11 percentage point, from yesterday to 2.61 percent at 12:02 p.m. London time, the least since Aug. 14. That’s the biggest drop since March 1. The 1.75 percent security due in September 2022 rose 0.85, or 8.50 pounds per 1,000-pound ($1,552) face amount, to 93.155. The two-year rate fell seven basis points to 0.38 percent, set for the steepest decline since June 26.
Carney Address
Carney’s speech in Nottingham, England, will be his first policy address since announcing Aug. 7 that officials would not consider raising borrowing costs before unemployment reached 7 percent so long as price and financial stability weren’t jeopardized. The 10-year gilt yield climbed to 2.76 percent on Aug. 22, the most since Aug. 8, 2011.
The Bank of England governor has sought to underpin the recovery by introducing forward guidance to quell investor speculation on higher borrowing costs. Policy makers left their main interest rate at 0.5 percent and maintained the central bank’s asset-purchase target, or quantitative easing, at 375 billion pounds at a meeting ended Aug. 1.
U.S. Treasury yields dropped from an almost two-year high yesterday after the Commerce Department said durable goods orders fell 7.3 percent, the first decrease in four months and the biggest since August 2012. The Treasury 10-year yield declined two basis points to 2.77 percent today after sliding three basis points yesterday.
‘Bullish Trades’
“Given the likelihood that Mr. Carney puts up a fight against recent market moves, gilts look the best of the major government bond markets to open bullish trades after the weaker U.S. data,” Kit Juckes, global strategist at Societe Generale SA in London, wrote in an e-mailed note.
Short-sterling futures advanced, indicating investors are reducing bets on higher interest rates. The implied yield on the contract expiring in December 2014 slid six basis points to 0.86 percent.
The additional yield investors demand to hold 10-year gilts over their two-year counterparts decreased, with the spread narrowing three basis points to 222 basis points, the tightest since Aug. 15.
Gilts lost investors 4.1 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.4 percent and Treasuries declined 3.4 percent.
The pound fell 0.4 percent to $1.5517 after reaching $1.55, the lowest since Aug. 15. Sterling depreciated 0.2 percent to 85.99 pence per euro after touching 86.17 pence, the weakest since Aug. 9.
‘Sustained Increase’
“Citi economists expect the governor to highlight that QE may be used again to counter a sustained increase in gilt yields,” Valentin Marinov, head of European, Group of 10 currency strategy at Citigroup Inc. in London, wrote in an e-mailed report today. “The speech could weigh on sterling and support euro-sterling. The lack of U.K. data releases this week could further augment the effect of BOE’s rate guidance.”
The pound has strengthened 5.5 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 4.6 percent and the dollar climbed 2.8 percent.
Volatility on U.K. government bonds was the highest in developed markets today followed by those of Belgium and Finland, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
