Bloomberg News

Gilts Fall Most in Three Months as Stock Gains Curb Safety Bid

October 15, 2011

Oct. 15 (Bloomberg) -- Gilts had their biggest weekly decline in three months as stocks gained around the world on optimism European policy makers will contain the debt crisis, curbing demand for the safety of government debt.

Ten-year yields reached the highest level since August as European stocks rallied for a third straight week. European Union Commissioner Olli Rehn said the 17-nation euro-region can avoid a calamity, according to a pre-recorded speech to a Dublin conference on Oct. 12. Group of 20 officials meeting in Paris this weekend said they are working on a plan to stem the euro- area’s debt woes, including a boost to the International Monetary Fund’s lending resources.

“Some of the despair in equity markets has eased up a bit so investors are taking some of their chips off the fixed-income table and looking at riskier asset classes,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “People are also feeling a little less gloomy about the political situation in Europe towards the debt crisis, even though the economic picture doesn’t look too good.”

The 10-year gilt yield rose 14 basis points, or 0.14 percentage point, this week to 2.61 percent as of 4:32 p.m. London time yesterday. It climbed to 2.67 percent on Oct. 13, the highest since Aug. 9. Thirty-year yields also increased 14 basis points, to 3.53 percent.

Stocks Gain

The Stoxx Europe 600 Index advanced 2.8 percent in the past week as optimism that euro-area policy makers will contain the sovereign debt crisis boosted demand for riskier assets. The FTSE 100 Index advanced 3.1 percent.

Stocks rallied even after Standard & Poor’s cut Spain’s credit rating by one level to AA-, the fourth-highest investment grade, in a statement issued late on Oct. 13. It was the country’s third downgrade in three years.

The pound appreciated 1.6 percent to $1.5803 and posted a 2.4 percent weekly advance versus the Japan’s currency to 121.82 yen. Sterling weakened 2 percent against the euro to 87.68 pence.

Gilts have returned 11 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Gains have been underpinned as the euro-region debt crisis drove investors to the relative safety of gilts, Prime Minister David Cameron pursued austerity measures amid a global economic slowdown and as the Bank of England resumed government debt purchases to keep borrowing costs low.

The central bank announced an increase in the size of its bond purchases on Oct. 6, expanding the program to 275 billion pounds from 200 billion pounds, the biggest rise since the first round of so-called quantitative easing began in March 2009. Policy makers “could well decide” to expand the program again, the Guardian newspaper quoted Bank of England deputy governor Charles Bean as saying in an Oct. 13 article.

The pound has weakened 1.3 percent in the past six months and 3.1 percent in the past year against a basket of its nine most-traded peers as measured by Bloomberg Correlation Weighted Indexes.

--Editors: Mark McCord, 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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