Bloomberg News

Gilts Yields Fall to Records on Euro-Region Turmoil

May 19, 2012

U.K. government bonds advanced for a fourth week, driving five- and 10-year yields to record lows, as deepening turmoil in the euro region spurred demand for the relative safety of gilts.

The pound fell the most against the dollar since the five- day period ending Nov. 25 after the Bank of England cut its growth forecasts in its quarterly Inflation Report, adding to speculation policy makers will resume their program of bond purchases to boost the economy. Gilts surged as Greek political party leaders meeting in Athens failed to form a permanent government. A new election has been called for June 17.

“Gilts have primarily been driven by Greece,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “The Inflation Report was also supportive of the notion that the asset-purchase facility may be restored. While the uncertainty remains, core markets such as gilts are going to stay well bid.”

The 10-year yield fell 14 basis points, or 0.14 percentage point, this week to 1.83 percent at 5 p.m. London time yesterday, when it dropped to 1.808 percent, the lowest since Bloomberg began compiling the data in 1989. The 4 percent bond due March 2022 rose 1.325, or 13.25 pounds per 1,000-pound ($1,581) face amount, to 119.43.

The five-year yield fell to a record 0.799 percent yesterday.

Euro ‘Storm’

Bank of England Governor Mervyn King said at a May 16 press conference that the U.K. faced threats from the euro region’s “storm,” adding that the economy will remain “subdued.”

The central bank halted its quantitative-easing program at 325 billion pounds on May 10 amid concern inflation is quickening. It will release minutes of the meeting on May 23.

The pound traded at $1.5788, a 1.8 percent drop on the week. The currency fell to $1.5733 yesterday, the lowest level since March 16. Sterling was at 80.61 pence per euro, 0.3 percent lower than its May 11 close, after touching 79.51 pence on May 16, the strongest since November 2008.

U.K. inflation slowed to the lowest rate since September 2010 in April, a report will say next week, according to economists surveyed by Bloomberg.

The pound has appreciated 3.9 percent in the past three months, the third-best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 4.2 percent and the yen 4.9 percent, while the euro was 0.6 percent stronger.

Gilts have returned 0.9 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries gained 1.4 percent and German bunds returned 3 percent, the indexes show.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net

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


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