U.K. government bonds rose for a second week as concern that Spain’s fifth austerity package will fail to resolve the Iberian nation’s financial crisis boosted demand for safer assets.
Sterling gained for a second week against the euro as Spanish protesters called for an end to the fiscal measures while a general strike in Greece drew as many as 35,000 demonstrators to downtown Athens. Gilts rose even as a report showed the U.K. economy shrank less than previously estimated in the second quarter.
“Risk in the euro zone remains a primary driver of gilt yields as investors sought the relative safety of sterling,” said Peter Chatwell, a fixed-income strategist at Credit Agricole (ACA) Corporate and Investment Bank in London. “Data showed some signs of improvement, but it seems the market is not yet convinced that the economy is about to turn around.”
The 10-year gilt yield dropped 12 basis points, or 0.12 percentage point, from last week to 1.72 percent at 4:36 p.m. London time yesterday after falling to 1.68 percent, the lowest since Sept. 10. The 1.75 percent bond due in September 2022 rose 1.065, or 10.65 pounds per 1,000-pound ($1,622) face amount, to 100.30. The yield on 30-year gilts dropped eight basis points to 3.06 percent.
Gilts returned 1.1 percent this quarter through Sept. 27, according to Bank of America Merrill Lynch indexes. German bunds gained 1.3 percent and U.S. Treasuries rose 0.6 percent.
Spanish Prime Minister Mariano Rajoy’s government announced on Sept. 27 a 13 billion-euro ($16.7 billion) package of spending cuts, and a new tax on lottery winnings in an effort to shrink the euro-area’s third-largest budget deficit. The Bank of Spain said last week early indicators suggest gross domestic product is still falling at a “significant pace” after the recession deepened in the second quarter.
Sterling posted the biggest quarterly advance against the dollar since the three months ended March as a report showed Britain’s services industry expanded at its fastest pace for more than a year in July, adding to evidence that the economy has returned to growth. The pound has gained 2.7 percent this quarter.
The Bank of England will keep its benchmark interest rate unchanged at 0.5 percent when policy makers set borrowing costs on Oct. 4, according to all 50 analysts surveyed by Bloomberg News. The central bank will stick to its bond-purchase target of 375 billion pounds, a separate survey shows.
The pound is little changed in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 0.7 percent and the dollar slumped 4.1 percent.
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