Bloomberg News

Gilts Gain as Government Cuts Growth Forecast; Pound Strengthens

November 30, 2011

Nov. 29 (Bloomberg) -- U.K. gilts advanced as Chancellor of the Exchequer George Osborne said economic growth will be slower than forecast this year and next, requiring the government to borrow more and extend spending cuts.

Longer-maturity bonds led advances as the Bank of England bought longer-dated securities under its quantitative-easing program today. The economy will grow 0.9 percent this year, less than the 1.7 percent forecast in March, and by 0.7 percent next year, from a projected 2.5 percent, Osborne said, citing the Office for Budget Responsibility. The 10-year yield fell to the least versus the bund since 2001 as German rates rose.

“It has been fairly well received,” said Peter Chatwell, a fixed-income strategist at Credit Agricole SA in London. “The statement is a reiteration of the government’s emphasis on running a tight fiscal ship despite the slippage in forecasts. The downbeat growth will indeed support gilts.”

Thirty-year yields fell five basis points, or 0.05 percentage point, to 3.06 percent at 4:31 p.m. London time, after reaching a record low 3.022 percent. The 4.25 percent bond due December 2040 gained 0.98, or 9.8 pounds per 1,000-pound ($1,560) face value, to 122.895. Ten-year yields were three basis points lower at 2.24 percent.

Gilts stayed higher even after the Debt Management Office revised up its planned bond issuance this fiscal year by 6.8 percent to reflect higher borrowing requirements. The debt agency said it will sell 178.9 billion pounds of securities for the year ending in March next year.

Higher Borrowing

Osborne blames the sovereign debt crisis in the euro area for the deteriorating outlook. King said yesterday said the U.K. is being “increasingly threatened” by the euro-area crisis, and authorities must be ready to act if it continues to escalate.

The government’s forecasts were preceded yesterday by a similarly gloomy outlook for the U.K. from the Organization for Economic Cooperation and Development, which said Britain may already be in recession and predicted that the Bank of England will probably add to stimulus through its bond-purchase program early next year.

The pound strengthened against the euro after the ECB failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks. While the central bank has failed to “sterilize” its bond program at least four times before, this is the first time it has happened since the central bank expanded the program to buy Italian and Spanish bonds.

Pimco Likes Gilts

Sterling gained 0.6 percent against the 17-nation currency to 85.39 pence. The pound rose for a second day against the dollar, climbing 0.6 percent to $1.5610, and gained for a third day versus the yen, appreciating 0.5 percent to 121.57.

The pound rose 1.8 percent in the past month, making it the second best performer among 10 developed-market peers after the dollar, according to Bloomberg Correlation-Weighted Indexes.

Gilts have returned 15 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German debt gained 6.3 percent and U.S. Treasuries rose 9.4 percent.

Gilts will continue to outperform bunds and Treasuries even as supply rises “because the Bank of England has got the clearest support for the government bond market,” Michael Amey, a London-based portfolio manager at Pacific Investment Management Co., told Francine Lacqua on Bloomberg Television’s “On the Move.” “The U.K. is not in the euro zone, it has its own currency, and it has a relatively clear policy framework. Gilts are cleanest of the dirty shirts.”

Foreign Buyers

Foreign investors boosted their gilt holdings by 12.5 billion pounds in October, after buying a net 9.2 billion pounds the previous month, according to data from the Bank of England today. That’s the most since April last year.

Gilts gained even as a report showed U.K. house prices increased for a third month in November.

The average cost of a home rose 0.4 percent from October to 165,798 pounds, Nationwide Building Society said. Values increased 1.6 percent from a year earlier. The Swindon-based lender said growth in property values will “remain soft.”

A separate report showed mortgage approvals increased more than economists forecast in October as record-low interest rates helped to support the housing market. Lenders granted 52,743 loans to buy homes, compared with a revised 51,193 in the previous month.

--Editors: Matthew Brown, Mark McCord

To contact the reporters 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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