Bloomberg News

Gilts Decline as European Leaders Pledge to Preserve Euro Bloc

July 28, 2012

U.K. government bonds fell for the first time in four weeks as European leaders said they would do whatever is needed to preserve the single-currency bloc, damping demand for safer assets.

Ten-year gilt yields climbed to the highest level in two weeks as German Chancellor Angela Merkel and French President Francois Hollande said yesterday they were “bound by the deepest duty” to protect the euro. European Central Bank President Mario Draghi said the day before that policy makers will do what is required to bring down surging borrowing costs in countries like Spain and Italy. The pound rose to a five-week high versus the dollar.

“We read Draghi’s comment as suggesting the bond-buying program is likely to be reactivated if pressures continue to build, and risk assets have bounced,” said John Stopford, head of fixed income at Investec Asset Management Ltd. in London. “At these levels government bonds, including gilts, look fairly fully priced.”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, this week to 1.54 percent at 5 p.m. London time yesterday, after dropping to a record 1.407 percent on July 23. The 4 percent bond maturing in 2022 fell 0.56, or 5.60 per 1,000 pound ($1,572) face amount, to 121.92.

Gilts have returned 4.1 percent this year as of July 26, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They outperformed German bunds, which gained 3.7 percent, after investors sought U.K. assets as a haven from the debt crisis.

Merkel and Hollande urged the “quick” implementation of resolutions made at a June 28-29 summit of European Union leaders, according to a joint statement after they spoke by telephone yesterday.

Pounds Gains

The pound rose for a third week against the dollar as speculation the European debt crisis will be contained improved the outlook for Britain’s economy.

The U.K. currency appreciated 0.6 percent this week to $1.5721 after rising to $1.5768 yesterday, the highest since June 20. Sterling dropped 1 percent to 78.62 pence per euro.

A decline in inflation expectations may give the Bank of England more scope to increase stimulus when it meets next week. The difference in yield between 10-year U.K. bond yields and index-linked securities of a similar maturity, used as a measure of inflation expectations, narrowed four basis points this week to 2.34 percent.

Economists surveyed by Bloomberg forecast the Bank of England will keep asset purchases at 375 billion pounds and leave its benchmark rate on a record-low 0.5 percent on Aug. 2.

To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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