Bloomberg News

Gilt Yields Climb to 2-Month High on Europe Outlook; Pound Rises

October 12, 2011

Oct. 12 (Bloomberg) -- Gilts fell, pushing 10-year yields to the highest in two months, as optimism European leaders will resolve the region’s sovereign debt crisis damped demand for the relative safety of U.K. government securities.

Thirty-year bonds declined for a fourth day as stocks advanced around the world and European Union Commissioner Olli Rehn said the region’s debt crisis can be resolved. Gilts dropped even after a report showed U.K. unemployment rose to a 15-year high. The pound climbed to the strongest in three weeks versus the dollar.

“Gilts are selling off slightly because the risk environment is a bit better,” said Russell Silberston, a portfolio manager in London at Investec Asset Management Ltd., which oversees about $95 billion. “The dollar is selling off and equities are making a bit of a bounce which is all indicative of improving risk appetite.”

The 10-year gilt yield increased seven basis points, or 0.07 percentage point, to 2.66 percent at 4:38 p.m. London time, after rising to 2.67 percent, the highest since Aug. 9. The 3.75 percent security due September 2021 fell 0.63, or 6.3 pounds per 1,000-pound face amount, to 109.475. The 30-year yield climbed eight basis points to 3.59 percent.

Stocks rose from Tokyo to New York as Rehn said there’s a fairly good chance that Europe can avert a “calamity.” Slovak parties reached an agreement to approve Europe’s enhanced bailout fund, paving the way for a repeated vote in the coming days. Euro-area leaders said this week they will have a plan by November to recapitalize banks.

Pound Gains

The pound appreciated 1.2 percent to $1.5770 after reaching $1.5798, the strongest intraday rate since Sept. 16. Sterling was little changed at 87.52 pence per euro.

U.K. unemployment rose to 8.1 percent in the three months through August, from 7.9 percent in the quarter ended July, the Office for National Statistics said in London. The number of unemployed increased to 2.57 million, the most since 1994 while jobless claims rose for a seventh month in September.

“Everyone is turning more bearish on the U.K.’s growth prospects and this sort of data doesn’t help,” said Shant Movsesian, a strategist in London at 4Cast Ltd., a research company that counts central banks among its customers. “More quantitative easing will be on the cards.”

Bank of England policy maker Adam Posen said in an interview with Bloomberg Television in New York yesterday that the latest round of monetary stimulus is the “right place” to start and officials are ready to do more if necessary.

‘Relatively Cautious’

Investec predicts the pound will fall and is “relatively cautious” on gilts due to the likely impact on further monetary easing on U.K. inflation, which may approach 5 percent by November, Silberston said. U.K. inflation of 4.5 percent in August, compares with a benchmark interest rate of 0.5 percent.

The central bank last week increased its bond purchase program to 275 billion pounds from 200 billion pounds, the biggest expansion since the first round of so-called quantitative easing in March 2009, saying slowing global growth and the euro-area debt crisis threaten the U.K. recovery.

The pound has declined 1.3 percent in the past six months and 2.6 percent in the last year, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies.

--Editors: Matthew Brown, Nicholas Reynolds

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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