Bloomberg News

Gilts Fall for Second Day on Cheaper Funding, European Auctions

December 01, 2011

Dec. 1 (Bloomberg) -- U.K. gilts fell for a second day after central banks worldwide lowered the cost of dollar funding and as successful Spanish and French auctions damped demand for the relative safety of U.K. government debt.

Ten-year yields climbed to a four-week high as the Debt Management Office attracted fewer bids at a 3 billion-pound ($4.72 billion) auction of the securities. Six central banks led by the Federal Reserve yesterday agreed to cut the cost of providing dollar funding via swap agreements and to make other currencies available as needed. The pound weakened for second day against the euro.

“Gilt yields rose today as risk sentiment appears to have improved after the coordinated action by the central banks,” said Jamie Searle, an interest-rate strategist at Citigroup Global Markets Ltd. in London. “Gilts have done really well this year because of their safe-haven status.”

The 10-year yield climbed six basis points to 2.37 percent at 12:40 p.m. London time after rising to 2.43 percent, the highest since Oct. 31. The 3.75 percent bond due December 2021 fell 0.58, or 5.80 pounds per 1,000-pound face amount, to 111.925. The 30-year rate rose 10 basis points, or 0.10 percentage point, to 3.24 percent.

Spain sold 3.75 billion euros ($5.06 billion) of notes with investors ordering more than twice the amount sold. France auctioned 4.3 billion euros of debt and managed to sell a 10- year bond at 3.18 percent, less than the rate at a previous auction on Nov. 3.

Weaker Demand

Investors submitted bids for 1.61 times the 10-year gilts the government sold, down from a bid-to-cover ratio of 1.76 at the previous auction of the securities on Oct. 4.

Gilts fell yesterday after the six central banks announced their agreement to provide cheaper dollar funding. The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said in Washington.

“With month-end demand out of the way and liquidity drying up into the year-end, gilt yields are rebounding from exceptionally low levels,” said Marc Ostwald, strategist at Monument Securities in London. “Reasonably good auction results from Europe also reduce demand for a safe-haven.”

Sterling gained 0.2 percent to $1.5730, and climbed 0.3 percent to 122.22 yen. It weakened 0.2 percent to 85.76 pence per euro.

“We are back in a risk-on phase and sterling will benefit from that,” Geoffrey Yu, a currency strategist at UBS AG in London, wrote in an emailed response to questions.

Manufacturing Shrinks

Gilts fell even as a report showed U.K. manufacturing shrank in November at the fastest pace since June 2009.

Markit Economics and the Chartered Institute of Purchasing and Supply said their factory index dropped to 47.6 last month from a revised 47.8 in October.

Bank of England Governor Mervyn King today urged banks to enhance efforts to bolster their defenses against the euro area’s debt turmoil, which he said now looks like a “systemic crisis.”

U.K. government bonds have returned 15 percent this year, while German debt gained 6.5 percent and U.S. Treasuries rose 9 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

--Editors: Nicholas Reynolds, Matthew Brown

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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