Bloomberg News

U.K. 10-Year Gilts Drop as Stocks Rise After Spanish Auctions

December 15, 2011

Dec. 15 (Bloomberg) -- U.K. 10-year gilts fell, pushing yields up from a record low, as stocks advanced and Spain sold almost double its maximum target at bond auctions today, easing demand for the British securities as a haven.

The pound erased its gain versus the euro as U.K. retail sales dropped more than economists predicted in November and an index of factory orders fell to the lowest in more than a year this month. Spain sold 6.03 billion euros ($7.8 billion) of bonds compared with a maximum target of 3.5 billion euros set by the Treasury. The FTSE 100 Index of shares climbed 0.6 percent, after slipping 2.3 percent yesterday.

“It’s a classic case of the market looking outward rather than internally, and the bigger picture is dominating the theme in gilt markets right now,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The Spanish auction was helpful, and there has been a bit of a relief rally” in higher-yielding assets.

Ten-year gilt yields increased three basis points, or 0.03 percentage point, to 2.12 percent at 4:33 p.m. London time after falling to 2.06 percent, the least since Bloomberg began compiling the data in 1992. The 3.75 percent bond due September 2021 dropped 0.240, or 2.40 pounds per 1,000-pound ($1,552) face amount, to 114.270. Two-year yields rose four basis points to 0.38 percent, after slipping to 0.309 percent.

The pound gained 0.2 percent to $1.5500 and was little changed at 84 pence per euro, after being as strong as 83.76 pence. It climbed yesterday to the most since Feb. 18.

Gilt Returns

Sterling has gained 3 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar rose 5.8 percent and the yen climbed 2.3 percent.

Gilts have returned 16 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. German bunds gained 9.2 percent and Italian bonds lost 8.1 percent.

U.K. government bonds climbed this year, pushing 10- and two-year yields to record lows, as the economy slowed, and the Bank of England increased its bond-purchase target by 75 billion pounds to 275 billion pounds.

Outlook Dims

Bank of England Chief Economist Spencer Dale said this week the economy may shrink for at least one quarter as the outlook dims in Europe, Britain’s biggest export market.

“To the extent that prospects for the economy continue to look poor in the euro area, that will limit prospects for the U.K. and will also reinforce the safe-haven status of gilts on a relative basis,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “Low yields are justified both on the grounds of pessimistic outlook for output growth, and the prospect of more asset purchases from the Bank of England.”

The factory gauge declined to minus 23 from minus 19 the previous month, the Confederation of British Industry said in a report in London today. That’s the lowest since October 2010. A measure of export orders fell to minus 32, the lowest since January 2010, from minus 31.

--Editors: Matthew Brown, Nicholas Reynolds

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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