Bloomberg News

Gilts Drop as Surge Seen Overdone; PMI Boosts Risk Bid

November 02, 2011

(Corrects month of previous PMI reading in sixth paragraph.)

Nov. 2 (Bloomberg) -- U.K. government bonds fell as investors judged gains in the past two days that pushed down yields the most since 2009 were not justified by the outlook for economic growth.

Two-year note yields rose for the first time in four days as Greek Prime Minister George Papandreou prepared to meet French President Nicolas Sarkozy and German Chancellor Angela Merkel in Cannes, France, to discuss the country’s decision to hold a referendum on its rescue package. The pound gained against the dollar. A report showing construction output in the U.K. unexpectedly grew last month fueled bets that record-low yields aren’t justified by the economic outlook.

After recent advances “it wouldn’t be a surprise if it was a struggle to see further gains” in gilts, 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 11:16 a.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 0.630, or 6.30 pounds per 1,000-pound ($1,601) face amount, to 112.915. The two-year rate rose four basis points to 0.57 percent.

Sterling was 0.3 percent stronger at $1.6003. It weakened 0.2 percent to 86.10 pence per euro after trading at 85.48 pence yesterday, the strongest level since Oct. 4.

PMI Data

A gauge of building activity based on a survey of purchasing managers rose to 53.9 from 50.1 in September, Markit and the Chartered Institute of Purchasing and Supply in London said in a report today. The median forecast of nine economists in a Bloomberg News survey was for a reading of 50, the level that marks the difference between contraction and expansion. A government report yesterday showed the economy grew faster in the third quarter than economists forecast.

The two-day slide in 10-year gilt yields through yesterday was the steepest since they tumbled 58 basis points on March 5- 6, 2009, when Bank of England Governor Mervyn King received permission to start printing money to buy assets to revive the economy in the wake of the global financial crisis.

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 made 9.1 percent, the indexes show. Greek bonds plunged by 43 percent.

Sterling has gained 2.5 percent in the past three months against a basket of nine major peers in Bloomberg Correlation- Weighted Indexes.

--Editors: Mark McCord, Matthew Brown

To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at

To contact the editor responsible for this story: Daniel Tilles at

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