Bloomberg News

Gilts Advance for a Third Week on European-Debt Tensions

May 12, 2012

Gilts advanced for a third week, driving 10-year yields to a record low, as signs the European debt crisis is worsening spurred demand for the relative safety of U.K. government debt.

The pound rose for a fourth week against the euro, reaching its strongest level in 3 1/2 years. Gilts gained as Greek politicians struggled to form a new government, increasing concern the nation will withdraw from the common-currency bloc. The Bank of England halted its bond-purchase program, or quantitative easing, at 325 billion pounds ($420 billion) on May 10 amid concern inflation is accelerating.

“Gilts still benefit from safe-haven demand amid the uncertainty surrounding Europe,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “If we go to another round of Greek elections, that prolongs the uncertainty in the market, and uncertainty in an environment of slowing growth will underpin demand for safety.”

The 10-year yield fell four basis points, or 0.04 percentage point, this week to 1.96 percent at 4:30 p.m. London time. The 4 percent bond due March 2022 rose 0.325, or 3.25 pounds per 1,000-pound face amount, to 118.13. The yield dropped to 1.881 percent on May 9, the lowest since Bloomberg began compiling the data in 1989.

Demand for U.K. government bonds this week pushed the difference between two- and 10-year yields to the narrowest in more than three years.

The spread was at 154 basis points yesterday after shrinking to 150 basis points on May 9, the least since January 2009, according to data compiled by Bloomberg based on closing prices.

Double-Dip

With the U.K. suffering its first double-dip recession since 1975, the nine-member Monetary Policy Committee, led by Governor Mervyn King, had to balance the need to bolster the economy with the threat of inflation, which has been above their 2 percent target for more than two years. The MPC made its decision with new quarterly economic forecasts that will be published next week.

The central bank left its benchmark interest rate at a record-low 0.5 percent, a level set in March 2009.

“The Bank of England may have disappeared for now, but they may make it clear that this is a suspension, not a termination, of QE,” Wand said.

Sterling Declines

Sterling fell against the dollar and euro yesterday as signs the economic outlook is worsening raised the prospect that King will hint at resuming bond purchases when the central bank releases its Inflation Report on May 16.

“They’ll have no choice but to revise down their growth projections” in the Inflation Report, said George Buckley, an economist at Deutsche Bank AG in London. “They have a dilemma of high inflation and very weak growth, but you definitely can’t rule more QE out.”

The pound gained 0.8 percent this week to 80.41 pence per euro, after rising to 79.97 pence yesterday, the strongest since November 2008. Sterling dropped 0.4 percent to $1.6089. It fell to $1.6062 yesterday, the lowest level since April 20.

The U.K. currency has appreciated 4.4 percent in the past three months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2 percent, and the euro was 0.2 percent weaker.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

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


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