Bloomberg News

Gilts Advance as U.K. Economy, U.S. Debt Woes Spurs Haven Bids

July 30, 2011

July 30 (Bloomberg) -- U.K. government bonds rose, pushing 10-year yields down by the most in a week since March last year, as showing faltering economic growth and concern over the U.S. debt ceiling fueled demand for a haven.

Gilts outperformed both German bonds and U.S. Treasuries this month as Spain was faced with the prospect of a further credit rating downgrade and U.S. politicians failed to reach an agreement to help the country avoid default. Data this week showed the U.K. economy slowed in the second quarter and consumer confidence declined. The pound rose from last week against the dollar and the euro and declined the most against the Swiss franc since December 2008.

“Gilts are supported by demand from the flight to quality buyers,” said Mohit Kumar, the head of U.K. and euro-area fixed-income strategy at Deutsche Bank AG in London. “Gilts are looking expensive at these yield levels, but people in the market are not comfortable with recent U.K. economic data and the situation in the U.S.”

The yield on 10-year gilts fell 25 basis points in the week to 2.86 percent as of 5:10 p.m. yesterday. That’s the biggest weekly decline since March 2009. Two-year yields fell eight basis points to 0.63 percent.

The pound rose 0.9 percent to $1.6453. It strengthened 0.7 percent against the euro to 87.49 pence. The pound fell 3 percent against the Swiss franc this week, the biggest decline since September 2009.

Growth Outlook

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.

U.K. consumer confidence fell in July as Britons became more pessimistic about the economic outlook, adding pressure on the Bank of England to keep the benchmark interest rate at a record low.

A sentiment index dropped to minus 30, the lowest since April, from minus 25 the previous month and minus 22 a year earlier, London-based GfK said yesterday. The report followed a survey by the Confederation of British Industry on July 28 that showed a measure of retail sales reached a 13-month low in July.

The 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.

BOE Rates

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. The central bank next meets to decide on rates on Aug. 4.

Gilts also gained as a solution to a budget stalemate in the U.S. eluded politicians. 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, yesterday canceled a vote on a plan that Senate leaders pledged to defeat.

Moody’s Investors Service said yesterday it may cut Spain’s credit rating further as the country’s region’s struggle to cut budget deficits.

--Editors: Matthew Brown, Peter Branton

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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