Bloomberg News

Gilts Rise as Consumer Sentiment Drops, U.S. Debt Concern Grows

July 29, 2011

July 29 (Bloomberg) -- U.K. government bonds rose as a drop in consumer confidence fueled bets the Bank of England will delay raising interest rates and concern that the U.S. won’t resolve its debt-ceiling deadlock fueled demand for a haven.

Gains pushed the 10-year yield down to within eight basis points of a record, after dropping this month by the most since August. An index of sentiment slipped five points from June to minus 30, London-based research group GfK NOP Ltd. said today. Bank of England policy maker David Miles on July 27 said attempts to slow inflation too quickly risk stalling the recovery. The pound weakened against the franc and the yen.

“The recent weak data and the delay in U.S. resolution on the debt ceiling really put the market on edge,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “Ten-year gilt yields are not too far away from the record low, and that’s a sign that people increasingly see them as a safe haven amid what’s going on in the euro zone and the U.S.”

The yield on 10-year gilts fell 10 basis points to 2.87 percent as of 4:18 p.m. in London. The yield touched a record low of 2.79 percent on August 25, 2010. The 3.75 percent security maturing in September 2020 rose 0.79, or 7.9 pounds per 1,000-pound ($1,644) face amount, to 107.01. Two-year yields fell three basis points to 0.64 percent, down seven basis points this week.

Pound Falls

U.K. bonds outperformed their German and U.S. counterparts this month, handing investors 2.8 percent compared with 2.6 percent from German securities and 1.2 percent from Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The pound fell 0.1 percent to 127.03 yen and declined 1.2 percent to 1.2960 Swiss francs. It appreciated 0.6 percent to $1.6470 after falling as much as 0.7 percent. Against the euro, sterling was little changed at 87.47 pence, up 0.7 percent since July 22.

Sterling rose versus the dollar after a report showed the U.S. economy expanded at a slower-than-forecast pace in the second quarter.

U.S. gross domestic product climbed at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than earlier estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase. Household purchases, about 70 percent of the economy, rose 0.1 percent.

U.K. Economy

Sterling has fallen 7.7 percent in the last 12 months, making it the second-worst performer among 10 developed-market currencies after the U.S. dollar, according to Bloomberg Correlation-Weighted Currency Indexes.

“Recent data suggested the U.K. economy is growing below trend, and some people in the market are scaling back their rate-hike expectations further,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “That is likely to keep the pound under pressure. Heightened concern about the U.S. debt ceiling also fuels risk aversion, which is not going to benefit the pound.”

Gilts benefited from demand for safer assets after Moody’s Investors Service today said it may downgrade Spain as its regional governments struggle to cut budget deficits.

Today’s confidence report followed a survey by the Confederation of British Industry yesterday that showed a measure of retail sales reached a 13-month low in July.

Deficit Plan

The U.K. economy expanded 0.2 percent in the second quarter after stagnating over the previous six months, the Office for National Statistics said on July 26. Even with the economic recovery under pressure, Chancellor of the Exchequer George Osborne said the same day he’ll stick to his deficit-reduction program, the biggest since World War II.

The Bank of England will keep its benchmark rate on hold for the rest of the year, according to a weighted average of 20 forecasts compiled by Bloomberg.

U.S. House Speaker John Boehner, falling short of the votes within his own party needed to increase the nation’s debt limit after a night of one-on-one appeals to members, canceled a vote on a plan that Senate leaders pledged to defeat.

The Obama administration will brief the public no earlier than after financial markets close on priorities for paying the nation’s bills if the $14.3 trillion debt ceiling isn’t raised, a Democratic Party official said. Treasury Secretary Timothy F. Geithner has said options to prevent a default will run out on Aug. 2 if the limit isn’t increased.

U.S. Disaster Risk

Former Bank of England Deputy Governor John Gieve said U.S. officials’ delay in agreeing on a deal to raise the debt limit runs the risk of a disaster that would echo the collapse of Lehman Brothers Holdings Inc.

“The problem with this kind of brinkmanship is, as we saw around Lehman -- after all, the Treasury wanted to save Lehman - - if you leave it to the last minute, that something can go wrong, something practical goes wrong, and you run out of time,” he said in an interview with Francine Lacqua on Bloomberg Television’s “The Last Word” yesterday. “I’m sure both sides fully expect to do a deal, but they’re running it very fine.”

Gieve was deputy governor for financial stability at the U.K. central bank when Lehman Brothers filed for bankruptcy in September 2008.

--Editors: Matthew Brown, Keith Campbell

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Lukanyo Mnyanda in Edinburgh News at lmnyanda@bloomberg.net

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


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