Bloomberg News

Gilts Gain, Pound Reaches 9-Month High Versus Euro, on EU Crisis

December 13, 2011

Dec. 12 (Bloomberg) -- Gilts rose, with 10-year yields dropping to a record, on speculation the measures agreed at last week’s European Union summit will fail to end the region’s debt crisis. The pound rose to a nine-month high versus the euro.

Two-year yields also approached an all-time low as Moody’s Investors Service said the summit didn’t diminish the risk it will cut the ratings of euro-area nations. Gilts also advanced as economists said a U.K. report tomorrow will show an index of house prices dropped for the third time in four months, adding to concern the economy is sliding back into a recession.

“On a relative basis, there’s still going to be demand for gilts,” said Vatsala Datta, a London-based interest-rate strategist at Lloyds Bank Corporate Markets. “The risk of recession remains.”

The 10-year yield fell seven basis points, or 0.07 percentage point, to 2.09 percent at 4:40 p.m. London time after dropping to 2.07 percent, the least since Bloomberg began compiling the data in 1992. The 3.75 percent bond due September 2021 gained 0.62, or 6.20 pounds per 1,000-pound ($1,563) face amount, to 114.51.

Two-year yields slid four basis points to 0.36 percent. They declined to 0.317 percent on Dec. 8, also the lowest since at least 1992.

The agreement announced by European leaders after their Dec. 9 summit in Brussels contained few new measures, Moody’s said in its Weekly Credit Outlook.

“In the absence of any decisive policy initiatives that stabilize credit-market conditions effectively, our intention as announced in November is to revisit the level and dispersion of ratings during the first quarter of 2012,” the company said.

Gilt Returns

Gilts have returned 15 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Investors bought the securities as an alternative to assets denominated in the euro as European Union leaders struggled to solve a debt crisis that has forced Greece, Ireland and Portugal to seek bailouts.

The Royal Institution of Chartered Surveyors will say its house-price gauge fell to minus 25 last month from minus 24 in October, according to economists surveyed by Bloomberg. Nationwide Building Society will say this week that its index of U.K. consumer confidence stayed at a record low in November, a separate survey showed.

Asset Purchases

The Bank of England’s first round of asset purchases in 2009 and 2010 may have had less impact on gilt yields than the central bank estimated, according to the Bank for International Settlements.

The 200 billion-pound program lowered yields by as much as 74 basis points, the BIS said in its quarterly review yesterday. That compares with an estimate by the Bank of England the measure reduced yields by 100 basis points.

The U.K. central bank started a new round of bond purchases in October and some policy makers have said more stimulus may be needed. The BIS said further measures may have a limited utility because bond yields are already “very low,” while the effect is smaller the longer the programs last.

The pound appreciated 0.9 percent to 84.68 pence per euro after rising to 84.55 pence per euro, the strongest level since Feb. 23. The currency weakened 0.4 percent to $1.5604.

Sterling has depreciated 1.3 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes which track 10 developed-nation currencies. The dollar rose 3.7 percent and the yen climbed 1.1 percent.

“Quantitative easing is likely to be revisited at some point in 2012,” said Neil Mellor, a strategist at Bank of New York Mellon Corp. in London. “Even if we don’t see quantitative easing in the first few months, we’ll definitely get references to it and reminders that they are willing to step in if they have to, and that’s not going to help sterling.”

--Editors: Nicholas Reynolds, Matthew Brown

To contact the reporter 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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