U.K. government bonds rose for a third day after Bank of England policy maker David Miles said it would be “misguided” to think an recovering economy signals an early interest-rate increase.
Benchmark 10-year yields dropped to the lowest level this month after Miles wrote in the Evening Standard newspaper that recent improvements doesn’t mean the economy is back to normal. Gilts advanced yesterday as Bank of England Deputy Governor Paul Tucker said the central bank was in “no rush” to withdraw stimulus. The pound was little changed before a report tomorrow that analysts predict will confirm the U.K. economy expanded in the second quarter.
“It’s dawning on people that central banks are still very nervous about the recovery,” said John Wraith, a fixed-income strategist at Bank of America Corp. in London. “The market is paring back on the extent it was disagreeing with the Bank of England’s forecasts. Gilts had been underperforming quite significantly, and we’re seeing a correction of that.”
The benchmark 10-year gilt yield fell two basis points, or 0.02 percentage point, to 2.78 percent at 9:47 a.m. London time after dropping to 2.76 percent, the lowest level since Aug. 30. The 2.25 percent bond due in September 2023 climbed 0.145, or 1.45 pounds per 1,000-pound ($1,600) face amount, to 95.45.
U.K. gilts lost 3.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bunds dropped 1.9 percent and Treasuries fell 2.5 percent.
Sustained growth is needed to remove slack from the economy and it’s mistaken to think an early increase in interest rates is needed, Miles wrote in the Evening Standard.
The Bank of England led by Governor Mark Carney introduced interest-rate guidance last month, pledging to keep borrowing costs low until the unemployment rate falls to 7 percent. It was 7.7 percent in the three months through July.
The pound traded at $1.5997 after advancing to $1.6163 on Sept. 18, the highest since Jan. 11. The U.K. currency weakened 0.2 percent to 84.31 pence per euro after appreciating to 83.53 pence on Sept. 18, the strongest since Jan. 17.
The pound has risen 6 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar weakened 0.1 percent, while the euro gained 5.4 percent.
U.K. gross domestic product expanded 0.7 percent in the three months through June, according to the median estimate of 31 economists surveyed by Bloomberg News before the Office for National Statistics report tomorrow.
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