Bloomberg News

Gilts Decline After Manufacturing Expands; End Five-Day Rally

February 01, 2012

Feb. 1 (Bloomberg) -- Gilts fell, with 10-year bonds ending the longest winning streak since August, as a U.K. report showing manufacturing expanded in January damped demand for the safety of British government debt.

Ten-year yields rose from within six basis points of a record low as the Treasury sold 2.5 billion pounds ($3.97 billion) of bonds maturing in 2025. The pound weakened against higher-yielding currencies as stock gains spurred the appetite for riskier assets. The Bank of England next meets on Feb. 9 after some members of the Monetary Policy Committee said after its Jan. 12 gathering that more bond purchases were “likely.”

The manufacturing data is “a factor for gilts’ decline,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “If that were to be confirmed by a strong services number on Wednesday there might be a bit more debate about whether the MPC really will want to increase the asset-purchase program.”

The 10-year yield climbed eight basis points to 2.05 percent at 4:095 p.m. London time after dropping 21 basis points over the previous five days. The 3.75 percent bond due September 2021 fell 0.75, or 7.50 pounds per 1,000-pound face amount, to 114.745. Two-year yields rose five basis points to 0.4 percent.

The U.K. factory gauge, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, rose to an eight-month high of 52.1 in January from a revised 49.7 a month earlier. Economists surveyed by Bloomberg forecast a reading 50, the level dividing expansion from contraction.

Home Prices

A report from Nationwide Building Society showed the average cost of a U.K. home fell 0.2 percent from December to 162,228 pounds, the lowest since February 2011.

The FTSE 100 Index of U.K. shares gained for a second day, rising 1.8 percent.

The Treasury received bids for 1.88 times the amount of debt on offer at today’s auction, compared with a so-called bid- to-cover ratio of 2.15 times at a sale of 2021 bonds on Jan. 11. Today’s auction was the first of five planned for this week totaling 7.25 billion pounds.

The pound dropped for the first time in three days against the euro, falling 0.3 percent to 83.23 pence.

Sterling weakened 1.2 percent against the South African rand, 0.7 percent versus the Mexican peso and 0.5 percent against the Australian dollar. The U.K. currency gained 0.7 percent to $1.5871.

Sterling has depreciated 0.7 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar declined 3 percent and the euro weakened 0.9 percent.

Gilts have handed investors a 0.4 percent return in 2012, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German government bonds rose 0.2 percent.

Since the Bank of England expanded its debt purchase program on Oct. 6, gilts have returned 0.55 percent after volatility was taken into account, according to Bloomberg risk- adjusted return rankings. The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualized.

--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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