Bloomberg News

Gilts Surge and Pound Strengthens as U.S. Job Data Disappoints

July 08, 2011

July 8 (Bloomberg) -- Gilts surged and the pound advanced against the dollar after a report showed the U.S. added fewer jobs than forecast in June, adding to signs the world’s biggest economy is struggling to emerge from recession.

The gains pushed 10-year yields to the lowest level this month as investors sought the safest fixed-income assets in the U.S., U.K. and Germany. U.S. employers added 18,000 workers in June, less than the 105,000 forecast in a Bloomberg survey and the fewest in nine months, Labor Department data showed today in Washington. Sterling advanced versus 13 of its 16 major peers.

“Weaker growth out of the U.S. implies more accommodative monetary policy for longer, and that’s having a positive impact on fixed-income assets across the board,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities Ltd. in London.

Ten-year gilts rose for the fourth day in five, pushing yields down 11 basis points to 3.19 percent as of 4:32 p.m. in London. The yield touched 3.18 percent, the lowest since June 28. The 3.75 percent security due September 2020 rose 0.89, or 8.9 pounds per 1,000-pound ($1,595) face amount, to 104.44. Yields on two-year notes were five basis points lower at 0.75 percent.

The pound rose 0.3 percent to $1.6015, after falling as low as $1.5932, the weakest intraday level since June 28. Sterling gained 1.2 percent to 88.81 pence per euro and was 0.5 percent stronger at 129.18 yen.

Pound Rallies

“Sterling is benefiting because it’s one of the few credible alternatives to the dollar for money managers looking to diversify,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London.

Treasuries and German bunds rallied as the slowdown in U.S. hiring underscored Federal Reserve Chairman Ben S. Bernanke’s comment that the economic recovery is “frustratingly slow,” boosting speculation that U.S. interest rates will stay lower for longer. The unemployment rate rose to 9.2 percent, the highest level this year.

Gilts were also lifted as U.K. data showed that the growth in prices of goods leaving British factories slowed to 0.1 percent in June from 0.2 percent in May. The Bank of England left its key rate at a record low 0.5 percent yesterday, and maintained its bond-purchase program to support the recovery.

Britain’s currency has still lost 3 percent this year against a basket of nine developed-market currencies tracked by Bloomberg Correlation-Weighted Currency Indexes, as worsening economic growth has made interest-rate increases less likely.

Slowing Growth

U.K. economic growth slowed to a virtual standstill in the second quarter, falling to 0.1 percent in the three months to the end of June, the National Institute of Economic and Social Research said in an e-mailed statement yesterday.

Investors are now betting that the Bank of England won’t raise borrowing costs until after June next year, data from Tullett Prebon Plc on forward contracts for the sterling overnight interbank average, or Sonia, show. As recently as February, the data indicated traders were betting on a rate increase this May.

The implied yield on short-sterling futures expiring in March 2012 was one basis point lower at 1.01 percent. The yield has fallen from a high of 2.08 percent in February as investors bet interest rates will stay lower for longer.

Short-sterling futures are used by analysts to gauge the future trajectory of borrowing costs between banks.

--Editors: Keith Campbell, Matthew Brown.

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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


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