Bloomberg News

U.K. 10-Year Gilts Surge for a Ninth Week on Slowdown Concern

June 11, 2011

June 11 (Bloomberg) -- Ten-year gilts rose for the ninth successive week, the longest run since Bloomberg began collecting the data in 1989, amid signs that growth is weakening, reducing the case for higher U.K. interest rates.

The pound fell for a second-straight week against the dollar as reports showed factory output contracted more than economists estimated in April and shop-price inflation slowed in May. Chancellor of the Exchequer George Osborne rejected calls for a “Plan B” to scale back his deficit-reduction program if the economic recovery stalls, while Moody’s Investors Service said the U.K.’s Aaa credit rating may be at risk should the government miss its debt-reduction targets.

“The data is turning down and forecasters are hopelessly behind the curve,” said Andrew Roberts, head of European interest-rate strategy at Royal Bank of Scotland Group Plc in London. For gilts, “you have seen a pretty chunky outperformance,” he said. “The bias is for lower yields.”

The yield on the 10-year gilt fell to 3.22 percent as of 3:48 p.m. in London yesterday, from 3.29 percent on June 3. The two-year note yield fell to 0.82 percent, the lowest since Nov. 10, from 0.90 percent last week.

Sterling slid to $1.6234 from $1.6426 and was little changed at 88.54 pence per euro from 89.10 pence per euro.

Slowing Growth

Bank of England officials are grappling with signs of deteriorating economic growth as inflation exceeds policy makers’ target rate. Investors pushed back bets that the bank will next increase interest rates to May, forward contracts on the sterling overnight interbank average show. As recently as February, traders were betting on an increase as soon as last month, data from Tullett Prebon Plc showed. The bank kept its benchmark interest rate at a record-low 0.5 percent this week.

A report next week may show consumer prices increased 4.5 percent in May from a year earlier, matching the pace in April, which was the fastest since 2008, according to the median of 29 economists surveyed by Bloomberg.

Gilts have handed investors 2.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have returned zero, while U.S. Treasuries made 3.1 percent.

--Editors: Mark McCord, Matthew Brown

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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