Bloomberg News

Gilts Fall on Reports Europe to Boost Rescue Fund; Pound Rises

October 19, 2011

Oct. 19 (Bloomberg) -- U.K. gilts fell for the first time in three day as reports that France and Germany have agreed to expand a bailout fund for stricken euro-area economies reduced demand for the safest assets.

Ten-year yields climbed from the lowest in a week as the Guardian newspaper reported that German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed to boost the European Financial Stability Facility to 2 trillion euros ($2.77 trillion) from 440 billion euros. Group of 20 finance ministers and central bankers will meet on Oct. 23 to discuss the debt crisis. The pound strengthened against the dollar, yen and euro as U.K. stocks rose.

“They have promised to come up with something so they’ve got to deliver at least part of a solution,” said Elisabeth Afseth, a fixed-income analyst at Evolution Securities Ltd. in London. “That’s why risk markets are doing better today and the safe-haven asset markets are moving lower.”

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 2.46 percent at 4:19 p.m. London time, after dropping to 2.40 percent yesterday, the lowest since Oct. 7. The 3.75 percent security due September 2021 fell 0.270, or 2.27 pounds per 1,000-pound face amount, to 111.225.

U.K. government debt has returned 12 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds have risen 7.1 percent, and U.S. Treasuries gained 8 percent.

The pound strengthened 0.6 percent to $1.5806 and advanced 0.6 percent to 121.41 yen. Sterling appreciated 0.4 percent to 87.18 pence per euro.

Fund Inflows

The U.K. currency advanced versus all but one of its 16 major counterparts as the FTSE 100 Index climbed 0.5 percent.

“Evidence from some of the flows in the market suggests some very large overseas investors are buying the pound in order to purchase U.K. assets,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. Additional bond purchases by the central bank “should boost U.K. asset prices,” he said.

The Bank of England raised the ceiling for so-called quantitative easing to 275 billion pounds from 200 billion pounds at its Oct. 6 meeting. All nine members of the Monetary Policy Committee also voted to keep the key interest rate at a record low of 0.5 percent, according to minutes of the gathering released today.

Central bank Governor Mervyn King said yesterday the global recovery is faltering and monetary policy is limited in its capacity to revive the U.K. economy.

King “was talking about the necessity for global imbalances to be rebalanced and he talked about the exchange rate as having a necessary part to play in that,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It reinforces the dovishness of the bank and the fact that they would be willing to see sterling weaken further.”

The pound has declined 1.2 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which measure a basket of 10 developed-market currencies.

--Editors: Nicholas Reynolds, Matthew Brown

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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


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