Bloomberg News

U.K. Gilts Fall as Stock Gains Boost Risk Appetite Before Sale

January 04, 2012

Jan. 3 (Bloomberg) -- U.K. gilts declined after beating all 26 major government bond markets tracked by Bloomberg last year as gains in stocks and commodities damped demand for a haven.

Ten-year yields rose before the Debt Management Office sells 3.75 billion pounds ($5.8 billion) of notes maturing in 2017 tomorrow. Gilts also fell after a report showed U.K. manufacturing shrank less than economists predicted in December. The Stoxx Europe 600 Index of shares gained 1.6 percent while the FTSE 100 Index rose 2.3 percent and copper prices climbed after a gauge of manufacturing in China rose. Sterling strengthened versus the dollar.

“Strong gains in commodities and stocks on the back of good news from Asia reduced demand for top quality government bonds including gilts,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Risk appetite may improve in the near term, but longer-term I expect the euro-debt crisis to continue to provide support for gilts.”

The 10-year gilt yield advanced six basis points, or 0.06 percentage point, to 2.03 percent at 5:05 p.m. London time. The 3.75 percent bond due September 2021 fell 0.525, or 5.25 pounds per 1,000-pound ($1,566) face amount, to 115.01.

Two-year yields rose three basis points to 0.36 percent, after falling to an all-time low 0.271 percent on Dec. 30.

Factory Output

Gilts completed a second year of gains in 2011, returning 17 percent and outperforming German bunds and U.S. Treasuries as investors sought the safest assets amid sovereign-debt turmoil in the euro region.

The pound rose 0.9 percent to $1.5659 and climbed 0.7 percent to 120.123 yen. It was little changed against the euro at 83.39 pence.

A gauge of factory output based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply rose to 49.6 from a revised 47.7 in November, the group said today. The median forecast of 19 economists in a Bloomberg News survey was for a drop to 47.3 from an initially reported 47.6 in November. A level below 50 indicates contraction.

Gilts fell even after a Lloyds Bank Corporate Markets report showed an index of British companies’ optimism about the economy declined compared with three months earlier.

The 10-year yield will rise to 2.25 percent by the end of the first quarter, according to a weighted average of 12 forecasts compiled by Bloomberg.

Gilt Spreads

Sterling fell against the euro after data showed German unemployment fell more than economists predicted in December. Further gains in the euro against the pound may be limited as the euro debt crisis entered a third year without a comprehensive solution, Jane Foley, a senior currency strategist at Rabobank International in London, wrote in an e-mailed note.

“The better tone of economic data may have provided a boost to risk appetite this morning, but there is no altering the fact that the storm clouds of the euro-zone crisis continue to gather,” Foley said.

Futures traders last week boosted bets the pound will decline against the U.S. dollar. The difference in the number of wagers on a decline in the pound compared with those on a gain, so-called net shorts, rose to 29,172 on Dec. 27 from 25,939 a week earlier, according to the Washington-based Commodity Futures Trading Commission.

--Editors: Matthew Brown, Nicholas Reynolds

To contact the reporter 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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