Bloomberg News

Ten-Year Gilt Yield Drops to Record, Pound Falls on Italy Sales

December 29, 2011

Dec. 29 (Bloomberg) -- U.K. 10-year gilt yields fell to a record and the pound dropped against the dollar as Italy raised less than its maximum target at a debt sale that was being watched as a test of investor sentiment toward the euro region.

The 10-year yield slid below 2 percent as investors sought the relative safety of U.K. government debt. Italy sold 7 billion euros ($9 billion) of bonds due between 2014 and 2022, versus its maximum target of 8.5 billion euros. The pound weakened against most of 16 major peers tracked by Bloomberg.

“This morning’s jitters ahead of the Italian auctions, and as the auction results don’t look particularly encouraging, underpins the bullish tilt here for gilts,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. Gilts are benefiting from the “overall fear of what could be in store in the euro zone heading into 2012,” he said.

The 10-year yield was four basis points, or 0.04 percentage point, lower at 1.97 percent at 12:55 p.m. London time after falling to 1.966 percent. The 3.75 percent bond due September 2021 rose 0.370, or 3.70 pounds per 1,000-pound face amount, to 115.61.

The two-year debt yield was little changed at 0.31 percent. It set an all-time low of 0.292 percent on Dec. 23.

The U.K. Debt Management Office is scheduled to auction 2.5 billion pounds ($3.9 billion) of 27-, 90- and 181-day bills in its last debt sales of the year tomorrow.

Sterling Gains

Gilts have handed investors a 17 percent return this year, the most since 1998, according to indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. German securities, Europe’s benchmark, have returned 9.4 percent and Italian debt lost 5.8 percent, the indexes show.

The pound was 0.4 percent weaker at $1.5396 and fell 0.6 percent to 119.81 yen. It strengthened 0.1 to 83.65 pence per euro.

Sterling has appreciated 2.7 percent in the past six months against a basket of developed-nation currencies, outperforming all but two according to Bloomberg Correlation-Weighted Indexes. The U.S. dollar rose 8.1 percent, while the Japanese yen strengthened 11 percent.

The pound has advanced 2.5 percent against the euro this year as turmoil in the euro-region’s debt markets weighed on the 17-member currency.

Data tomorrow is forecast to add to concern the crisis is damping growth in the U.K. economy. House prices stagnated in December, leaving the average cost of a home unchanged from November, a Nationwide Building Society report will show according to the median estimate in a Bloomberg News survey.

--Editors: Mark McCord, Nicholas Reynolds

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net.

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


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