Replies to post #140486 on Traders of the Caribbean

[Dredinvestments]

U.K. Gilts Climb After BOE Says Inflation May Miss 2% Target
Share | Email | Print | A A A

By Gavin Finch

Aug. 12 (Bloomberg) -- U.K. government bonds advanced after the Bank of England said inflation may miss its 2 percent target as the economy endures a “slow” recovery.

The advance pushed the yield on the two-year security to the lowest level since July 14 as Governor Mervyn King said it’s “more likely than not” that consumer-price growth will slow to less than 1 percent this year. The pound traded near the lowest level this month against the dollar as traders reduced bets that policy makers will raise interest rates next year.

“The key point is that inflation, at current rate assumptions, still undershoots the target,” said Richard McGuire, head of European fixed-income strategy at Royal Bank of Canada in London. “The BOE will retain its easing bias, and its policy is tilted toward further actions down the line.”

The yield on the two-year gilt dropped 9 basis points to 1.05 percent as of 5:45 p.m. in London. The 4.25 percent security due March 2011 rose 0.13, or 1.3 pounds per 1,000-pound ($1,655) face amount, to 104.96.

The pound slid as much as 0.5 percent to $1.6392 before trading 0.3 percent higher at $1.6523. It weakened as much as 0.3 percent to 86.14 pence per euro before trading at 86.09.

The U.K. will find itself “in a difficult position” for “some years,” King said today at a press conference in London. Policy makers decided on Aug. 6 to expand its asset-purchase program by 50 billion pounds to 175 billion pounds because “there were real downside risks to inflation,” King said.

The yield on the March 2010 interest-rate futures contract slid to 1.24 percent today, from 1.36 percent yesterday and 1.64 percent on Aug. 5.

Breakeven Rate

The U.K. two-year breakeven rate, a gauge of investor inflation expectations, declined. The rate, which measures the difference in yield between regular and index-linked bonds, fell 10 basis points to 1.46 percentage points.

The central bank spent 125 billion pounds since March as part of the asset-purchase program and had permission to use as much as 150 billion pounds, about 10 percent of Britain’s gross domestic product. Chancellor of the Exchequer Alistair Darling has now authorized an extra 25 billion pounds.

Gilts earned investors 1.3 percent this month through Aug. 11, according to Merrill Lynch & Co.’s U.K. Gilts Index. That compares with a 0.8 percent loss for German debt and a 0.7 percent loss for U.S. Treasuries, Merrill indexes show.

To contact the reporter on this story: Gavin Finch in London at [e-mail]
Last Updated: August 12, 2009 12:48 EDT