Bloomberg News

Gilts Advance on Stocks, Home Prices; Pounds Gains Versus Euro

September 01, 2011

Sept. 1 (Bloomberg) -- U.K. 10-year bonds rose for the first time in three days as stocks declined and an industry report showed home prices unexpectedly dropped in August, boosting demand for the perceived safety of government debt.

Ten-year yields fell from the highest level in three weeks as investors reduced bets that the Bank of England will raise interest rates. The average price of a house slipped 0.6 percent, after gaining 0.3 percent in July, Nationwide Building Society said. Economists surveyed by Bloomberg forecast prices to be unchanged. The FTSE 100 Index slid as much as 0.9 percent. U.S. stocks swung between gains and losses, with the Standard and Poor’s 500 Index falling as much as 0.5 percent.

“We are seeing safe-haven flows and gilts are also on the front foot,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The whole data picture is discouraging overall, and obviously that’s creating a nice tailwind and that’s why gilts are firmer.”

Ten-year gilt yields fell six basis points to 2.54 percent at 4:17 p.m. in London, after rising to 2.64 percent earlier today, the highest since Aug. 10. The 3.75 percent bond due September 2020 rose 0.515, or 5.15 pounds per 1,000-pound ($1,616) face amount, to 109.680. The two-year yield dropped four basis points to 0.56 percent.

Gilts have handed investors a 7.2 percent return this year, compared with 5.2 percent from German debt and 7.2 percent from Treasuries, according to the European Federation of Financial Analysts Societies. U.K. debt gained 2.7 percent in August, the indexes show.

Manufacturing Shrinks

U.K. manufacturing contracted the most in more than two years in August, according to a gauge based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply. The reading fell to 49 from 49.4 in July, according to an e-mailed report. A level below 50 indicates contraction. New orders fell the most in almost 2 1/2 years.

Short-sterling futures advanced, leaving the implied yield on the contract expiring in December one basis point lower at 1 percent, indicating traders are reducing wagers on higher U.K. borrowing costs. The central bank kept its benchmark rate at 0.5 percent on Aug. 4.

Britain sold 3 billion pounds of 3.75 percent bonds maturing in 2021 today, attracting bids for 1.99 times the amount of debt on offer.

Pound Gains

The pound strengthened for a second day against the euro after a report showed European manufacturing shrank more than initially estimated in August.

A manufacturing gauge based on a survey of purchasing managers in the euro region fell to 49 from 50.4 in July, Markit said today. That was below an initial estimate of 49.7 published on Aug. 23. European confidence in the economic outlook plunged the most since December 2008 last month, the European Commission said Aug. 30.

“It’s probably correct to say that the balance of news has been negative, but it’s been more so in other parts of the world, the euro zone in particular,” said Adam Cole, head of global currency strategy in London at Royal Bank of Canada, the nation’s largest lender. “There’s already a lot of bad news in the price of sterling already.”

The pound strengthened 0.3 percent to 88.19 pence per euro, after depreciating to 88.85 pence yesterday, the weakest level since Aug. 10. Sterling fell for a third day against the dollar, losing 0.6 percent to $1.6166. It lost 1.7 percent to 1.2871 Swiss francs, a third day of declines.

Investors should sell the pound against the Swiss franc because the Bank of England will likely resume asset purchases, which would override support from the country’s AAA rating, according to BNP Paribas SA.

“We believe that yield differentials and central bank policy will dominate all other factors, leaving the pound vulnerable to further downside,” Mary Nicola, a strategist at BNP Paribas in New York, wrote in a client note today. “With the U.K.’s fiscal hands tied, deterioration of the economic data will force monetary policy to do more heavy lifting.”

--With assistance from Scott Hamilton, Anchalee Worrachate in London and Simone Meier in Zurich. Editors: Mark McCord, Peter Branton

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Ed Ballard in London at eballard2@bloomberg.net

To contact the editor responsible for this story: Keith Campbell at k.campbell@bloomberg.net


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