Bloomberg News

U.K. Gilts Outperform Euro-Area Peers as Fitch Cuts Greek Rating

July 14, 2011

July 14 (Bloomberg) -- U.K. government bonds advanced relative to their euro-area counterparts after Greece’s credit grade was cut three levels by Fitch Ratings, stoking demand for the securities as a haven.

The extra yield, or spread that investors demand to hold Italian 10-year bonds instead of similar-maturity gilts approached a euro-era record as the Mediterranean nation paid the highest yield in three years at a sale of 2017 bonds. Fitch cut Greece to CCC from B+ yesterday. Thirty-year securities rose as the U.K. sold 2 billion pounds ($3.2 billion) of 4.25 percent 2040 debt. U.K. bonds gained this week as reports showed inflation slowed and jobless claims increased last month.

Gilts “are being supported by the uncertainty in the euro zone,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “It’s a combination of the reduced inflationary pressure and the ongoing uncertainty.”

The 30-year yield decreased two basis points to 4.16 percent as of 4:23 p.m. in London. The 4.25 percent security maturing December 2040 gained 0.285, or 2.85 pounds per 1,000- pound face amount, to 101.445. The yield on the 10-year gilt also fell two basis points, to 3.10 percent, after sliding to 2.93 percent on July 12, the least since October. Two-year yields were little changed at 0.72 percent.

Bonds Climb

British government bonds have advanced this month as concern that Europe’s sovereign-debt crisis is spreading to some of the euro area’s bigger economies fueled demand for the safest assets, and on speculation that slowing economic growth will limit the Bank of England’s ability to raise rates as the European Central Bank tightens monetary policy.

Gilts have returned 1.6 percent since the end of June, compared with a 3.7 percent loss by Italian bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish bonds handed investors a 1.9 percent loss, the indexes show.

U.K. 10-year bonds yielded 254 basis points less than their Italian counterparts today, up from a 2011 low of 77 basis points on Feb. 2. The spread widened to 260 basis points on July 11, the most since before the euro’s 1999 debut, based on closing Bloomberg generic prices.

The pound was little changed at 87.85 pence per euro. It appreciated on July 12 to 87.49 pence, the strongest level since June 16, and bought $1.6119, from $1.6107 yesterday.

--With assistance from Anchalee Worrachate in London. Editors: Matthew Brown, Mark McCord

To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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