Bloomberg News

Pound Rises Versus Most as Budget Gap Narrows More Than Forecast

January 24, 2012

Jan. 24 (Bloomberg) -- The pound rose against all but one of 16 major currencies tracked by Bloomberg as a report showed the U.K. budget deficit shrank more than economists predicted in December, boosting the nation’s status as a haven.

U.K. 30-year gilts outperformed German bonds as Bank of England policy maker Adam Posen said officials were ready to expand their debt-purchase program should growth and inflation forecasts provide justification. The U.K. sold 4.75 billion pounds ($7.4 billion) of 2052 gilts through banks after receiving orders worth 12.4 billion pounds, the Debt Management Office said. Sterling rose the most against the Japanese yen.

“The public-sector finances data today came in better than expected on a monthly basis, and that supports the relative safety of the pound,” said Jane Foley, a senior currency strategist at Rabobank International in London. “The U.K. economic outlook, on its own, doesn’t look promising, but at least the government shows it’s committed to improving the country’s fiscal positions.”

The pound jumped 1.2 percent to 121.30 yen and strengthened 0.3 percent to 83.38 pence per euro as of 5:04 p.m. London time. It rose 0.2 percent to $1.5595.

Sterling has fallen 0.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar dropped 1.2 percent, and the euro declined 0.9 percent.

The 30-year yield dropped one basis point to 3.14 percent after falling to 3.11 percent. The 4.25 percent security due in December 2040 advanced 0.24, or 2.4 pounds per 1,000-pound face amount, to 120.875. The extra yield that investors demand for holding 30-year gilts instead of the equivalent German bonds fell four basis points to 51 basis points.

Budget Deficit

The 10-year gilt yield rose two basis points 2.18 percent, within two basis points of the highest this year. Two-year note yields also advanced two basis points, to 0.45 percent.

U.K. net borrowing excluding support for banks was 13.7 billion pounds in December, compared with 15.9 billion pounds a year earlier, the Office for National Statistics said today. Economists surveyed by Bloomberg forecast 14.9 billion pounds, according to a median estimate.

Chancellor of the Exchequer George Osborne has pledged to stick to his spending plan as European nations struggling to tame deficits see their credit ratings lowered. Net debt rose above 1 trillion pounds last month for the first time since records began in 1993.

‘Significant Challenge’

The country’s debt as percentage of its gross domestic product, currently at around 76 percent, is likely to rise over the next three years, breaching the “critical” 90 percent before declining, according to Barclays Capital.

“This highlights the fact that the government still has a significant challenge ahead if it is to put a brake on the rapid increase in the debt-to-GDP ratio and achieve its target of starting to cut this ratio by 2015-2016,” Barclays economist Blerina Uruci wrote in an e-mailed note today. “Although not under immediate threat, the U.K.’s triple A rating is far from assured.”

The U.K. sold the 3.75 percent bonds due in 2052 at a yield spread two basis points above that of 2049 gilts, the Debt Management Office said. As a result of today’s sale, a so-called mini-tender operation planned for the week starting Feb. 27 was canceled, the debt agency said on its website.

The sale saw “strong demand and that’s positive for gilts,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London.

Gilt Returns

The syndicated deal is part of 178.9 billion pounds of gilts the debt agency plans to sell in the fiscal year that ends in March to finance the deficit and repay maturing securities.

The 10-year break-even rate, a gauge of inflation expectations derived from the yield difference between regular and index-linked bonds, fell five basis points to 2.69 percentage points.

Gilts handed investors a 1.1 percent loss this year, after earning 17 percent in 2011, including reinvested interest, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds fell 0.9 percent in 2012, with U.S. Treasuries 0.7 percent lower.

--With assistance from Hannah Benjamin and Jennifer Ryan in London. Editor: Matthew Brown

To contact the reporter on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Daniel Tilles at

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