Gilts gain first time in 5 weeks as BoE boosts purchases

UK government bonds rose, snapping a four-week decline, as the Bank of England voted to expand its asset-purchase program by £50 billion ($77.6 billion) to help contain borrowing costs.

Ten-year yields dropped to the lowest in a month as signs the European debt crisis is worsening boosted demand for the relative safety of UK securities. Ten-year gilts outperformed 30-year debt as the central bank left its purchase categories unchanged from its previous round of buying. The pound climbed to the strongest since 2008 against the euro after the European Central Bank refrained from committing to help bring down bond yields in Spain and Italy.

“Ongoing concerns around Europe will keep the bid to core products including gilts,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “The fact the BoE didn’t target the longer-end of curve within their buybacks and stuck with the original buckets has caused the longer-end to underperform.”

The 10-year gilt yield dropped 14 basis points, or 0.14 percentage point, this week in London time yesterday.

The 30-year rate declined three basis points to 3 per cent. The difference in yield, or spread, between 10- and 30-year gilts expanded 11 basis points over the week to 142 basis points, the widest level since June 18.

The Bank of England’s decision to raise its quantitative- easing target to £375 billion on July 5 was forecast by 31 of 40 economists in a Bloomberg News survey. Seven predicted an increase to £400 billion. The central bank reduced the amount it will buy in each tender and lengthened the program to four months from the three taken in the previous round.

The ECB cut its main interest rate on the same day to a record 0.75 per cent and reduced the deposit rate to zero. President Mario Draghi said there was “no discussion of further unconventional measures” to help cap borrowing costs in nations such as Spain and Italy.

The pound rose 1.6 per cent this week to 79.33 pence per euro after climbing to 79.27 pence yesterday, the strongest level since November 2008. Sterling fell 1.5 per cent to $1.5478. Gilts returned 2.3 per cent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.1 per cent, and US Treasuries rose 2 per cent.