Bloomberg News

U.K. Two-Year Gilt Yield Approaches Record Low on Italy Debt Cut

September 20, 2011

Sept. 20 (Bloomberg) -- U.K. two-year gilt yields fell to within half a basis point of a record low after Standard & Poor’s lowered Italy’s credit ranking, boosting demand for assets perceived as safer.

Ten-year gilts were little changed, erasing gains, as S&P cut Italy’s rating one notch to A from A+, citing a weaker economic growth outlook. Sterling was little changed against the euro as European stocks reversed losses, and rebounded versus the dollar. The Stoxx Europe 600 Index gained 1.4 percent after dropping as much as 0.6 percent.

“Gilts are benefitting from flight-to-safety flows after Italy’s downgrade,” said Vatsala Datta, an interest-rate strategist at Lloyds Bank Corporate Markets in London.

The two-year gilt yield was little changed at 0.54 percent at 11:18 a.m. in London, after falling to 0.492 percent. It declined to 0.49 percent on Sept. 12, the lowest since Bloomberg began collecting data on the securities in 1992. The 4.5 percent security due March 2013 was at 105.755. The 10-year gilt yield was at 2.40 percent, after falling as much as six basis points to 2.34 percent.

The Bank of England publishes minutes of its September policy meeting tomorrow. The central bank kept its main interest rate at a record low 0.5 percent and maintained its bond-buying program, known as quantitative easing, at 200 billion pounds.

Economic Assist

The Bank of England said yesterday its bond-purchase plan had “economically significant” effects. The program, started in March 2009, may have raised gross domestic product by 1.5 percent to 2 percent, and increased inflation by between 0.75 to 1.5 percentage points, the central bank said in its quarterly bulletin.

Bank of England policy maker Adam Posen called for the central bank on Sept. 13 to buy as much as 100 billion pounds in securities within three months and said the delay in acting has made economic prospects “worse.”

“There are chances that other members might have joined Posen in calling for more QE,” Lloyds’ Datta said. “The center of gravity of the committee is moving towards further easing, especially given the scenario in Europe.”

The Monetary Policy Committee voted 9-0 to leave interest rates on hold in August, minutes released on Aug. 17 showed.

Gilts have returned 11 percent this year, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German debt has gained 8.1 percent, and U.S. Treasuries rose 8.6 percent, the indexes show.

The pound was at 87.15 pence per euro, unchanged from yesterday when it reached 86.71 pence, the strongest level since Sept. 14. Sterling rose to $1.5711 after falling to $1.5633 yesterday, the lowest level since Jan. 12.

Sterling has fallen 5.6 percent in the past 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: Daniel Tilles, Matthew Brown

To contact the reporter on this story: Keith Jenkins in London at

To contact the editor responsible for this story: Daniel Tilles at

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