Bloomberg News

U.K. Pound Falls Against Euro on Economic Outlook Concern

June 01, 2012

U.K. government bonds rose, pushing yields across all maturities to record lows below 3 percent, as investors sought safety amid signs Europe’s financial crisis is slowing global growth.

Ten-year gilts advanced for a third day after Spanish Economy Minister Luis de Guindos said the future of the euro was at stake in Italy and Spain, and a U.S. report showed employers hired fewer workers than economists forecast. The pound fell to the weakest in four months against the dollar after a gauge of U.K. manufacturing slid to the lowest since the depths of the global financial crisis in 2009.

“Gilts yields at these excessively low levels can only be explained by risk aversion in the market as the euro debt crisis drags on without signs of a solution,” said Mohit Kumar, head of European interest-rate strategy at Deutsche Bank AG in London. “We find gilts very expensive but as long as concern over the debt crisis continues, yields may go lower.”

The yield on the 10-year gilt fell five basis points, or 0.05 percentage point, to 1.52 percent at 4:12 p.m. in London after dropping to 1.439 percent, the lowest since Bloomberg began tracking the data on 1989. The 4 percent bond due March 2022 rose 0.445, or 4.45 pounds per 1,000-pound ($1,531) face amount, to 122.36. The yield slid 23 basis points this week.

Note Advance

The five-year yield dropped as much as eight basis points to a record 0.556 percent. The 30-year yield declined to an all- time low 2.76 percent, after being as high as 3.52 percent on March 16.

Yields on 10-year German bonds and U.S. Treasuries also fell to all-time lows as signs the global economy is stalling drove demand for the safest government securities.

“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” de Guindos told a conference in Sitges, Spain, yesterday. The euro area is in real danger of disintegrating unless policy makers revamp the bloc’s fiscal and economic ties, Economic and Monetary Commissioner Olli Rehn said today in Helsinki.

U.S. payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, the Labor Department said in Washington. The median estimate was for a 150,000 advance in May.

The extra yield investors demand to hold 10-year U.K. gilts instead of two-year notes shrank to 1.27 percentage points, the least since October 2008, according to data compiled by Bloomberg based on closing prices. The narrowing spread shows traders are betting the inflation rate will slow.

Pound Falls

The pound weakened for a fifth day against the yen after Markit Economics and the Chartered Institute of Purchasing and Supply said their index of U.K. manufacturing dropped to 45.9 in May, the first reading below 50 this year.

Sterling declined for a second day versus the euro as the British Chambers of Commerce predicted the U.K. economy will barely expand this year. Gross domestic product will grow 0.1 percent in 2012 as turmoil from the euro-area debt crisis hurts demand, the London-based organization said.

“With our largest trading partner in recession, we could be in for a very tough year with few signs of recovery,” said Andy Scott, an account manager at currency specialist HiFX in Windsor, west of London. Lack of growth will make “monetary easing all the more likely, increasing the risk of the pound dropping below $1.50.”

The pound fell 0.3 percent to $1.5357 after dropping to $1.5269, the weakest since Jan. 13. Sterling depreciated 0.5 percent to 120.06 yen after sliding to 118.81 yen, the lowest since Jan. 19. It declined 0.4 percent to 80.60 pence per euro.

The U.K. currency has strengthened 2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, the second-best performer after the dollar, which gained 3.4 percent.

Gilts returned 17 percent over the past year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 15 percent, and U.S. Treasuries rose nine percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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