Bloomberg News

U.K. Gilts Drop as Stocks Rise After German Confidence Improves

March 26, 2012

U.K. 10-year gilts fell, on course for their first quarterly decline in a year, as stocks rose and a report showed German business confidence unexpectedly climbed, sapping demand for British debt as a haven.

The losses pushed the yield up from the lowest since March 14. The U.K.’s benchmark stock index, the FTSE 100 Index, gained 0.8 percent and the Stoxx Europe 600 Index rose 0.9 percent. Treasuries headed for their biggest monthly drop in more than a year and German bunds also slid. Gilt yields rose for the first time in six days as Chancellor Angela Merkel said Germany may back plans for the temporary and permanent euro-area rescue funds to run at the same time.

“With the tail risk in Europe starting to fade, the safe- haven flows into the U.K. could start unwinding,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks. “Any rally in gilts will be temporary.”

Yields on the 10-year gilt rose five basis points, or 0.05 percentage point, to 2.33 percent at 4:22 p.m. London time, leaving it 35 basis points higher since Dec. 30. The 4 percent bond due March 2022 lost 0.50, or 5 pounds per 1,000-pound ($1,586) face amount, to 114.785. The rate fell as low as 2.24 percent on March 23.

The pound was 0.4 percent stronger at $1.5925 after falling to as low as $1.5801. It was little changed at 83.63 pence per euro. Europe’s common currency gained 0.4 percent to $1.3324, after losing as much as 0.6 percent.

German Confidence

The Treasury 10-year yield climbed five basis points to 2.28 percent and the rate on similar-maturity German bunds jumped eight basis points to 1.95 percent.

The Munich-based Ifo institute said its business climate index increased to 109.8 this month from 109.7 in February, fueling optimism that Europe’s largest economy may withstand the sovereign debt crisis. Merkel’s comments signaled Germany may drop its opposition to proposals to expand the 17-nation region’s financial backstop against the euro-area turmoil.

U.K. bonds stayed lower after U.S. Federal Reserve Chairman Ben S. Bernanke said in a speech in a speech today in Arlington, Virginia that continued accommodative monetary policy will be needed to make further progress reducing unemployment. The central bank bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 to June 2011.

Rallied ‘Too Much’

U.K. debt securities have lost 2.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They have declined as signs that the euro-region’s debt crisis is easing sapped demand for safety, and amid speculation that the economy may be recovering enough to enable the Bank of England to end its asset-purchasing program.

The bonds rose last week, pushing 10-year yields down by the most since November, as the Debt Management Office said it would issue fewer gilts in the 2013 fiscal year and Chancellor of the Exchequer George Osborne maintained the government’s austerity drive in the annual budget.

“It just seems maybe we rallied too much at the end of last week,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “We can still push higher in yields” to about 2.35 percent by the end of the week, he said.

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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