Bloomberg News

U.K. 30-Year Gilt Yields Fall to Least Since 1996; Pound Drops

October 04, 2011

Oct. 4 (Bloomberg) -- U.K. gilts rallied as the euro-region debt crisis stoked demand for comparatively safer assets and investors added to bets the Bank of England will this week announce further monetary stimulus to revive the economy.

The gains pushed yields on 30-year U.K. government debt to the lowest since at least 1996 after Eurogroup policy makers said they are weighing imposing further losses on Greek bondholders. Gilts also rose after a report showed growth in Britain’s construction industry slowed more than estimated in September, strengthening the case for an expansion in the central bank’s asset-purchase program, known as quantitative easing. The pound fell against the dollar and the euro.

“There’s still a lot of uncertainty about the euro-zone debt crisis and that gives gilts a bit of a bid from a safe- haven point of view,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities Ltd. in London. “Yields are also pushing lower because there’s a relatively good chance that there will be further quantitative easing, possibly as early as this week.”

The yield on the 30-year gilt due December 2040 fell 17 basis points to 3.256 percent, the lowest since at least March 1996 when Bloomberg began compiling the data, before settling at 3.32 percent as of 3:50 p.m. in London.

Benchmark 10-year gilt yields sank 11 basis points to 2.24 percent. The 3.75 percent security due September 2021 rose 1.03, or 10.3 pounds per 1,000-pound face amount, to 113.385. Two-year note yields were two basis points higher at 0.60 percent.

‘Increasingly Probable’

The pound fell 0.1 percent to $1.5414 and lost 0.9 percent to 86.11 pence per euro. Sterling was little changed at 118.26 yen.

It is becoming “increasingly probable” that another round of government-bond purchases may be needed to boost the economy, Bank of England policy makers said in the minutes of its Sept. 8 policy meeting. The central bank has the tools available to provide additional “monetary loosening” should the economy continue to deteriorate, Chief Economist Spencer Dale said in an interview with the Daily Mail published on Sept. 29.

Standard & Poor’s affirmed the U.K.’s AAA credit rating and said the outlook is stable, according to a statement released yesterday. The ratings company described the U.K. as having a “wealthy, open, and diversified economy, supported by a well- established political system and macroeconomic policy framework, which can react quickly to economic challenges.”

Credit Easing

U.K. Chancellor of the Exchequer George Osborne yesterday proposed lending billions of pounds of public money directly to companies struggling to obtain credit from banks as a means of shoring up the economy. The proposal, which comes as the central bank prepares to announce its next interest-rate and government debt buying decisions on Oct. 6, would see the Treasury buy bonds issued by small and mid-sized companies in a program known as credit easing.

A gauge of building activity in the U.K. based on a survey of purchasing managers dropped to 50.1 from 52.6 in August, Markit and the Chartered Institute of Purchasing and Supply in London said in a report today. That’s lower than the median forecast of 51.6 in a Bloomberg survey of 10 economists, though it remained above the 50 level that indicates expansion.

Luxembourg Prime Minister Jean-Claude Juncker indicated bondholders will have to take larger losses on Greek debt than planned. Finance ministers are considering revising a July plan that foresaw investors contributing 50 billion euros ($66 billion), so-called private sector involvement, to a 159 billion-euro rescue.

The Treasury sold 3.25 billion pounds of 3.75 percent bonds due September 2021 today at an average yield of 2.24 percent, attracting demand worth 1.8 times the securities offered.

Gilts returned 12 percent this year, compared with 8.2 percent for German bunds and 9.9 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federal of Financial Analysts Societies.

--Editors: Matthew Brown, Peter Branton

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

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


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