Bloomberg News

Gilts Decline as Construction Rises; Pound Gains Versus Dollar

November 02, 2011

Nov. 2 (Bloomberg) -- U.K. gilts declined, snapping a three-day gain, as a gauge of building activity unexpectedly increased and investors speculated this week’s bond slide in yields was overdone.

Two- and 10-year rates rose after falling to record lows yesterday as stocks gained and Greek Prime Minister George Papandreou prepared to meet the leaders of France and Germany to discuss his plan to hold a referendum on the nation’s rescue package. The pound strengthened against the dollar amid speculation the Federal Reserve will signal it intends to introduce additional asset purchases at a policy meeting today.

“Given that stock markets are having a small bounce as well, that is sympathetic to the idea that yields would be a little higher,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “It certainly has been a remarkable run” over the past couple of days, he said.

The 10-year yield rose seven basis points, or 0.07 percentage point, to 2.28 percent at 4:10 p.m. London time, after dropping to 2.17 percent yesterday, the lowest since Bloomberg started collecting data on the securities in 1992. The 3.75 percent bond due September 2021 fell 0.680, or 6.80 pounds per 1,000-pound ($1,601) face amount, to 112.865.

The two-year rate climbed two basis points to 0.55 percent. It dropped to 0.44 percent yesterday.

An index of U.K. construction output increased to 53.9 in October from 50.1 in September, Markit and the Chartered Institute of Purchasing and Supply said today. A reading above 50 signals expansion. A government report yesterday showed the economy grew faster last quarter than economists forecast.

The FTSE 100 Index advanced 1.1 percent and the Stoxx Europe 600 Index gained 0.9 percent.

Crisis Meeting

Papandreou was summoned to Cannes on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out last week in crisis meetings.

U.K. government bonds have returned 14 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 8.6 percent, and U.S. Treasuries gained 9.1 percent.

The pound strengthened 0.2 percent to $1.5979, halting a two-day decline. The U.K. currency weakened 0.4 percent to 86.30 pence per euro.

Fed officials are probably engineering a third round of large-scale asset purchases to boost the economy, while they are unlikely to announce a decision today, according to a Bloomberg News survey. Sixty-nine percent of respondents said Chairman Ben S. Bernanke will embark on a third round of easing, with 36 percent predicting the move in the first quarter of next year, according to the poll of 42 economists from Oct. 26 to 31.

Sterling has gained 2.4 percent in the past three months according to Bloomberg Correlation-Weighted Indexes, which track the currencies of 10 developed nations. The dollar has strengthened 5.2 percent.

--With assistance from Blanche Gatt in London. Editors: Nicholas Reynolds, Matthew Brown

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

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


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