U.K. government bonds dropped for a second day after Federal Reserve policy makers voiced support for slowing their debt purchases this year, damping demand for fixed-income securities.
Benchmark 10-year gilt yields climbed to the highest since August 2011 after the Fed minutes released yesterday showed most officials supported Chairman Ben S. Bernanke’s plan to start tapering their $85 billion in monthly bond purchases this year. Treasuries dropped yesterday after the minutes were issued. Sterling weakened after Bank of England policy maker Martin Weale said the central bank may need to extend its 375-billion pound ($584 billion) stimulus program if the economy stalls.
“The market’s open is all about the Fed minutes”, said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Treasury yields have moved up significantly in the last session and that’s what’s driving gilt yields higher.”
The U.K. 10-year yield rose four basis points, or 0.04 percentage point, to 2.75 percent at 11:24 a.m. London time after climbing to 2.76 percent, the highest since Aug. 8, 2011. The 1.75 percent bond maturing in September 2022 fell 0.33, or 3.30 pounds per 1,000-pound face amount, to 92.045.
The Fed’s debate over when to taper its monthly bond purchases has roiled financial markets around the world and sparked a selloff in fixed-income assets.
Gilts lost investors 4.4 percent this year through yesterday, according to Bloomberg World Bond Indexes. Treasuries declined 3.9 percent and German bonds dropped 2.3 percent.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the minutes of the Fed’s July 30-31 gathering released in Washington.
The pound weakened for a second day against the dollar after Weale said in an interview with the Daily Telegraph that there may be circumstances where it “would be sensible to undertake further asset purchases.”
The Bank of England left its bond-buying program on hold at its most recent meeting on July 31-Aug. 1 and kept its benchmark interest rate at a record-low 0.5 percent.
Euro-area services expanded in August for the first time in 19 months, according to a report released today by London-based Markit Economics based on a survey of purchasing managers.
“Weale’s comments have put the sterling back under some massive pressure,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. “In light of the moves we’ve seen following the Fed minutes and in reaction to the stronger-than-expected PMI figures in Europe, we look for sterling to be the underperformer today.”
The pound dropped 0.6 percent to $1.5567 after advancing to $1.5718 yesterday, the strongest level since June 18. The U.K. currency weakened 0.2 percent to 85.47 pence per euro.
Economists surveyed by Bloomberg predict a government report tomorrow will show U.K. gross domestic product increased 0.6 percent in the second quarter, in line with an earlier reading released on July 25.
The pound has gained 6.4 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 4.3 percent and the dollar strengthened 3.3 percent.
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