Bloomberg News

U.K. Gilts Fall, Pound Gains Versus Franc on U.S. Debt Agreement

August 01, 2011

Aug. 1 (Bloomberg) -- U.K. government bonds declined and the pound rose against the yen and franc as demand for riskier assets rose on optimism that U.S. lawmakers will approve a deal to raise the nation’s debt ceiling and avert default.

Ten-year gilts snapped a three-day advance. The U.S. deal reached last night will raise the debt limit by at least $2.1 trillion and slash government spending by $2.4 trillion or more. The House of Representatives plans votes today and the Senate may follow.

“The market is optimistic that what on Friday appeared to be an imminent default seems to be averted for now, and hence there’s a rally in risk assets,” said Nick Stamenkovic, a fixed income strategist at RIA Capital Markets Ltd. in Edinburgh. “It’s still unclear what will happen to the U.S. credit rating. But for the time being, this should take some shine off government bonds, including gilts.”

The yield on 10-year gilts rose four basis points to 2.90 percent at 10:20 a.m. in London, after falling 25 basis points last week, the biggest weekly decline since March 2009. The 3.75 percent security maturing in September 2020 fell 0.360, or 3.60 pounds per 1,000-pound ($1,643) face amount, to 106.735. Two- year yields advanced two basis points to 0.65 percent.

Gilts beat their German and U.S. counterparts this year, handing investors a 5.4 percent return, compared with a 2.9 percent gain from German debt and a 4.3 percent return from Treasuries, according to the European Federation of Financial Analysts Societies.

U.K. Data

The pound rose 0.6 percent against the franc to $1.2986 after reaching $1.3092. It gained 0.8 percent to 127.19 yen after falling in the previous three sessions. It was little changed at 87.67 pence per euro and $1.6425.

Congressional leaders, leaving no extra time before a default threatened for tomorrow, are racing to push through a compromise sealed with President Barack Obama last night after a weekend of negotiations that capped a months-long struggle over raising the $14.3 trillion debt ceiling.

Gilts pared their decline and the pound dipped versus the dollar after a measure of manufacturing activity missed economists’ estimates. A gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply shrank to 49.1 in July, the lowest since June 2009, according to an e-mailed report today. That was worse than the median forecast of 51 from 28 economists surveyed by Bloomberg.

The Confederation of British Industry cut its growth forecast for the U.K. economy after gross domestic product barely grew in the second quarter. The U.K. will grow 1.3 percent this year, compared with an estimate of 1.7 percent in May, the country’s biggest employers’ group said in a quarterly forecast released in London today. The CBI’s growth prediction for 2012 is unchanged at 2.2 percent.

Halifax, the mortgage unit of Lloyds Banking Group Plc, may say this week that house prices were stagnant in July, according to a separate survey.

Sterling has fallen 8.2 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.

--Editors: Keith Campbell, Matthew Brown.

To contact the reporter 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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