The pound climbed to the strongest this month against the euro after Fitch Ratings said AAA nations in the currency bloc are at risk of downgrades, boosting demand for the perceived safety of U.K. assets.
Sterling advanced for a second day versus the dollar after a U.K. report showed an index of house prices improved in May more than economists forecast. Gilts dropped for a second day as bidding declined at a 4.75 billion-pound ($7.38 billion) sale of five-year notes. Spanish 10-year yields rose to a euro-era record after Fitch said the nation will “significantly’ miss its budget deficit targets.
“The safe-haven angle is pushing the pound higher versus the euro,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The pound is deemed as a secure place in Europe to park cash. Meanwhile, the euro is suffering again given Spain’s 10-year yields trading at record highs.”
The pound rose 0.5 percent to 80.21 per euro at 4:19 p.m. London time after climbing to 80.12 pence, the strongest level since May 31. Sterling appreciated 0.4 percent to $1.5550, and gained 0.5 percent to 123.62 yen.
The U.K. currency gained for a second day versus the euro after Fitch Managing Director Ed Parker said ratings in the currency bloc were under “strong downward pressure.”
If there’s “no light at the end of the tunnel soon,” the risk of a breakup of the 17-member euro area will rise, he said in Oslo. “Last minute” solutions are raising the cost of managing the crisis, he said.
Spain’s 10-year bond yield jumped to 6.834 percent, the highest since the euro was introduced in 1999.
The pound was also boosted after the Royal Institution of Chartered Surveyors said its house-price index rose to minus 16 in May from minus 19 in April. A reading below zero means more surveyors saw price drops than gains. A separate report showed U.K. factory output fell more in April than economists forecast.
Gilts fell after the Debt Management Office said today’s five-year auction attracted bids for 1.28 times the amount on offer, down from 1.37 at a sale in April. The government will sell 1.5 billion pounds of bonds maturing in 2060 on June 14.
The yield on the five-year gilt rose four basis points, or 0.04 percentage point, to 0.78 percent after increasing four basis points yesterday. The 1.75 percent note maturing in January 2017 dropped 0.19, or 1.9 pounds per 1,000-pound face amount, to 104.385.
“There are two gilt auctions this week and that is helping to push yields higher as the market prepares room for more supply,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London.
The 10-year bond yield gained three basis points to 1.68 percent, and the 30-year yield also increased three basis points to 3.05 percent.
The Debt Management Office plans to sell 12.5 billion pounds of gilts this month and another 17.6 billion pounds next month, according to estimates from Barclays Plc.
Gilts have returned 2.5 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries gained 1.9 percent, and German bunds advanced 3.9 percent.
Sterling has gained 2 percent in 2012, the second-best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar was the best, gaining 2.1 percent, and the euro fell 2.3 percent.
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