Bloomberg News

Gilts Advance as Italian Borrowing Costs Surge; Pound Weakens

November 15, 2011

Nov. 14 (Bloomberg) -- U.K. gilts rose, pushing yields toward a record low, as a surge in Italian borrowing costs at a debt auction spurred demand for safer assets.

Ten-year gilts advanced for the first time in three days before a report tomorrow that economists said will show inflation slowed last month, helping preserve the value of the fixed payments from government debt. The pound weakened after an index of U.K. employers’ hiring intentions dropped last month.

“The market remains skeptical about the situation in Italy and the euro zone, and therefore gilts should be well- underpinned,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “The market will be watching the inflation data tomorrow for signs of whether price pressures have subsided.”

The 10-year bond yield fell eight basis points, or 0.08 percentage point, to 2.21 percent at 4:03 p.m. London time. The 3.75 percent security due September 2021 rose 0.765, or 7.65 pounds per 1,000-pound ($1,596) face amount, to 113.54. The rate dropped to 2.115 percent on Nov. 9, the lowest since Bloomberg started collecting data on the securities in 1989.

Italy auctioned 3 billion euros ($4.1 billion) of five-year notes at a yield of 6.29 percent, the highest since June 1997, and up from 5.32 percent at the previous sale on Oct. 13. The nation was forced to pay 6.087 percent on one-year bills at a sale on Nov. 10, the most in 14 years.

New Leader

Former European Union Competition Commissioner Mario Monti will head a new government as Italy seeks a leader who can restore confidence in its ability to cut the euro region’s second-biggest debt. Monti was offered the post yesterday, less than 24 hours after Prime Minister Silvio Berlusconi resigned.

U.K. consumer prices rose an annual 5.1 percent in October, down from 5.2 percent in September, according to a Bloomberg News survey before tomorrow’s report. Inflation may have slowed as food costs fell and retailers offered discounts.

The difference between yields on five-year notes and inflation-protected securities, a gauge of expectations for consumer prices known as the breakeven rate, shrank to 2.30 percentage points from this year’s high of 2.93 percentage points in April.

Gilts have returned 14 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 8.3 percent, and U.S. Treasuries rose 8.8 percent.

Pound Falls

The pound weakened for the first time in three days against the dollar after CIPD, an association for human-resource professionals, said its index of U.K. hiring intentions dropped to minus 3 in the fourth quarter from minus 1 in the previous three months.

“The figures point to a slow, painful contraction in the jobs market,” with some employers reacting to “increasing uncertainty as a result of the euro-zone crisis and wider global economic turmoil,” Gerwyn Davies, public-policy adviser at CIPD, said in a statement.

Economists predict government data this week will show claims for jobless benefits rose for an eighth month in October. Bank of England Governor Mervyn King will present new economic forecasts at a press conference on Nov. 16 in London.

The pound fell 1 percent to $1.59, and slid 1.4 percent to 122.34 yen. It was little changed at 85.63 pence per euro.

Sterling has appreciated 1.6 percent in the past month, making it the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. It’s still 4.2 percent weaker in the past year.

“While the U.K. has a credible government and austerity plan in place, sterling is still dogged by slow growth, high inflation, and a central bank that has re-embarked on quantitative easing,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Sterling fundamentals are still poor.”

The three-month sterling Libor-OIS spread, which measures banks’ reluctance to lend, rose to 48.3 basis points, the highest since July 2009.

--Editors: Nicholas Reynolds, Mark McCord

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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