Bloomberg News

Gilts Fall as Moody’s German Outlook Casts Doubt on Haven Assets

July 24, 2012

U.K. government bonds fell, pushing yields up from record lows, as a decision by Moody’s Investors Service to cut the outlook on Germany’s credit rating signaled haven assets may be less safe than some investors perceive.

Benchmark 10-year gilts snapped a two-day gain after Moody’s lowered its outlooks for the Aaa ratings of Germany, the Netherlands and Luxembourg, citing concern the countries will have to support weaker euro-region members. The pound rose toward the strongest since 2008 against the euro and appreciated versus the dollar.

“Gilts have come off largely in response to the move in bunds after the Moody’s reassessment on Germany,” said Adam McCormack, head of gilt sales at Barclays Capital in London.

The 10-year gilt yield rose two basis points, or 0.02 percentage point, to 1.50 percent at 1:59 p.m. London time after falling to a record 1.407 percent yesterday. The 4 percent bond due in March 2022 dropped 0.245, or 2.45 pounds per 1,000-pound ($1,553) face amount, to 122.36.

Gilts outperformed bunds, with the extra yield that investors demand to hold 10-year U.K. securities instead of German ones shrinking four basis points to 26 basis points. That’s the narrowest since July 3, based on closing prices.

U.K. government debt has returned 4.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4.5 percent.

Break-Even Rate

The U.K. Debt Management Office said today this week’s 4 billion pound ($6.21 billion) sale of index-linked gilts due in March 2044 would be priced at 100.311, equivalent to a real yield of 0.115 percent.

The difference in yield between 10-year gilts and similar- maturity index-linked securities, a measure of inflation expectations known as the break-even rate, widened two basis points to 2.36 percentage points.

The pound rose 0.3 percent to 77.89 pence per euro after appreciating to 77.55 pence yesterday, the strongest since October 2008. The U.K. currency gained 0.2 percent to $1.5534.

“There is a broad outflow of capital from Europe seeking a safer home,” said Paul Robson, senior foreign-exchange strategist at Royal Bank of Scotland Plc in London. “This is a continuation of the trend in euro-sterling.”

The euro will find so-called support against the pound at around 77.44 pence, the 50 percent retracement of the single- currency’s rally from 2000 to 2008, Karen Jones, head of fixed- income, commodity and currency technical analysis at Commerzbank AG in London, wrote today in a note to clients.

The pound’s gain was tempered by an industry report that showed U.K. mortgage approvals fell to the lowest in more than three years in June. Mortgage approvals dropped to 26,269, the lowest since January 2009, from 29,567 in May, the British Bankers Association said in an e-mailed statement.

Sterling has appreciated 4.3 percent in the past year, the third-best performer after the yen and the dollar among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes.

To contact the reporter on this story: Neal Armstrong in London at

To contact the editor responsible for this story: Paul Dobson at

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