Gilts Drop, Pound Gains as BOE Unanimous on Holding Debt Plan

By Anna Rascouet

Sept. 23 (Bloomberg) -- U.K. government bonds fell and the pound rose after the Bank of England’s minutes of its Sept. 10 meeting showed policy makers were unanimous in their decision to keep the asset-buying plan at 175 billion pounds ($287 billion).

The difference in yield, or spread, between two- and 10- year gilts was near the widest since at least 1992 after no mention was made of cutting the rate paid to financial institutions for deposits held at the central bank. Investors sought the safety of shorter-dated securities on speculation policy makers will keep the benchmark interest rate low.

“There was nothing in the minutes to alter the prevailing mindset,” said Charles Diebel, head of European rate strategy at Nomura International Plc in London. “The spread is on a consistent steepening trend and I expect it to continue until we get some clarification on the reserve-rate story.”

The yield on the 2-year note rose 3 basis points to 0.88 percent as of 1:23 p.m. in London. The 4.25 percent security due March 2011 fell 0.05, or 50 pence per 1,000-pound ($1,644) face amount, to 104.85. The 10-year gilt yield gained 2 basis points to 3.78 percent. The spread between the securities was at 290 basis points, within 2 basis points of the most since at least January 1992, when Bloomberg began compiling the data.

The pound strengthened to less than 90 pence per euro for the first time since Sept. 18, appreciating as much as 0.6 percent to 89.85 pence. It advanced 0.4 percent against the dollar to $1.6423.

Switching Sides

Bank of England Governor Mervyn King and David Miles switched sides and joined the unanimous vote for no change in the debt-buying plan, arguing that consensus was better for now even though a higher amount may be warranted. All nine members of the Monetary Policy Committee opted to keep the interest rate at 0.5 percent, the minutes released today in London showed.

The Bank of England agreed on Aug. 6 to expand by 50 billion pounds its program of asset purchases designed to lower borrowing costs and pull the economy out of its deepest recession since World War II.

The government, which is planning to raise 220 billion pounds this fiscal year, may boost sales to 237 billion pounds in the year ending March 2011, according to Citigroup Inc.

The country hired HSBC Holdings Plc, Deutsche Bank AG, Goldman Sachs Group Inc. and UBS AG to manage a sale this week of inflation-protected bonds maturing in 2050, according to the Debt Management Office. The banks will start selling the new 0.5 percent linker tomorrow, the debt agency said yesterday.

The FTSE 100 Index of U.K. shares climbed 0.6 percent as Aviva Plc and Prudential Plc gained after Cazenove recommended shares of life insurers.

Gilts lost investors 1.1 percent this month, compared with a 0.5 percent decline for German bonds, according to Merrill Lynch & Co. indexes. Treasuries were little changed, Merrill indexes show.

To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net.