Bloomberg News

Gilts Have Weekly Drop on U.K. Recovery; Pound Rises Above $1.60

September 07, 2012

U.K. 30-year bonds declined in the week as a report showing industrial production surged in July added to signs Britain’s recession is easing.

Borrowing costs touched the highest in more than two months after European Central Bank President Mario Draghi’s plans to stem the sovereign debt crisis eroded demand for haven assets. The pound touched a four-month high above $1.60 versus the dollar as today’s factory data followed a purchasing managers’ index this week that showed services expanded more than economists estimated. Ten-year gilts reversed an intraday decline after a report showed the U.S. economy added fewer jobs than analysts estimated last month.

“It has been a week of stronger U.K. data, which is having some downward impact on gilts,” said Adam McCormack, head of gilt sales at Barclays Plc in London. “This move is more of a reaction to the developments in peripheral Europe.”

Thirty-year gilt yields climbed eight basis points, or 0.08 percentage point, this week to 3.03 percent at 4:48 p.m. London time, and slipped less than two basis points today. They reached 3.14 percent earlier, the highest since July 5. The price of the 4.5 percent bond maturing in December 2042 fell 1.98, or 19.80 pounds per 1,000-pound ($1,602) face amount, in the week, to 129.045.

Spanish 10-year bond yields fell below 6 percent for the first time in four months today.

Euro Advances

U.K. industrial production rose by the most in 25 years in July after manufacturing rebounded from disruption caused by the extra public holiday in June for the Queen’s Jubilee. Output climbed 2.9 percent, after falling 2.4 percent in June, the Office for National Statistics said today in London. The median forecast of 28 economists in a Bloomberg News survey was for a gain of 1.5 percent.

The difference in yield, or spread, between 30-year gilts and two-year notes widened to 291 basis points, the most since April 4, signaling investors were adding to bets for faster inflation.

Gross domestic product rose 0.2 percent in the three months through August, compared with 0.3 percent in the quarter through July, the National Institute of Economic and Social Research, whose clients include the Bank of England and the U.K. Treasury, said in an e-mailed statement today.

Gilts have returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which gained 2.7 percent, and U.S. Treasuries, which earned 2.1 percent.

Sterling Strength

Sterling climbed 0.5 percent to $1.6015 after reaching $1.6034, the strongest level since May 15. The pound slipped 0.8 percent to 79.89 pence per euro, after touching 79.94 pence, the weakest level since July 5.

The 17-nation currency rose versus the dollar to the highest since May 22, boosted after European Central Bank President Mario Draghi said yesterday that asset purchases “will enable us to address severe distortions in government bond markets.”

The U.S. economy added 96,000 workers last month following a revised 141,000 increase in July that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000.

The U.K. currency has gained 1.1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 1.7 percent and the euro rose 1.8 percent.

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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