Bloomberg News

Gilts Fall as European Optimism Reduces Demand for Safer Assets

September 28, 2011

Sept. 28 (Bloomberg) -- U.K. government bonds fell for a fourth day as speculation European policy makers will devise long-term solutions to the region’s sovereign-debt crisis, damped demand for safer assets.

The 10-year gilt erased earlier gains as European Commission President Jose Barroso said the region’s permanent bailout fund should start sooner and a study on introducing common bonds in coming weeks will be presented. Bank of England policy maker David Miles signaled he may be moving closer to voting for more asset purchases to spur growth. The yield on the 10-year Treasury climbed eight basis points. The pound was within one cent of a one-week high against the dollar.

“Gilts are drifting lower with Treasuries ahead of the five-year note auction in the U.S.,” said Eric Wand, a fixed- income strategist at Lloyds Bank Corporate Markets in London. “They outperformed bunds and Treasuries quite well today, but it looks like there’s a bit of late profit taking, driven by the selloff in the U.S.”

The yield on the 10-year gilt rose two basis points to 2.55 percent at the 5 p.m. close in London. It climbed to 2.57 percent yesterday, the most since Sept. 15. The 3.75 percent security due September 2020 dropped 0.150, or 1.50 pounds per 1,000-pound ($1,563) face amount, to 110.435. The two-year yield gained three basis points to 0.59 percent.

Gilts dropped as Barroso called for the faster creation of a permanent-rescue fund and appealed to central bankers to use their powers as the ultimate line of defense against the region’s debt crisis.

‘Substantial Ammunition’

The Bank of England has “substantial ammunition” if needed, and the case for more quantitative easing “has become in my mind quite finely balanced,” Miles said in an interview in the Times newspaper published today. “It wasn’t quite as closely balanced a decision two or three months back, before we really got the bad news over the summer.”

Gilts have returned 2.3 percent in September and 9.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt has gained 7.3 percent in 2011 and U.S. Treasuries rose 8.6 percent, the indexes show.

The U.K. Debt Management Office said State Street Bank Europe Ltd. will act as a gilt-edged market maker in the wholesale sector of the conventional gilt market from Oct. 10. This increases the number of primary dealer firms in the U.K. government bond market to 22, the DMO said in a statement.

The pound was little changed at $1.5637 after rising to $1.5706 yesterday, the highest level since Sept. 21. The British currency fell 0.2 percent to 87.07 pence per euro.

Sterling has strengthened 1.7 percent in the past three months, paring its drop over the previous year to 3.7 percent, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Currency Indexes.

--With assistance from Fergal O’Brien and Paul Dobson in London. Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net

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


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