Bloomberg News

Gilt Yields Drop to Three-Week Low as German Production Slides

November 07, 2012

U.K. government bonds rose, pushing 10-year yields to the lowest level in three weeks, as a decline in German industrial production added to signs the region’s debt crisis is harming Europe’s biggest economy.

Britain’s benchmark securities advanced for the third time in four days after U.S. President Barack Obama was re-elected, boosting speculation the Federal Reserve will stick to its program of buying bonds to spur growth. Bank of England policy makers began a two-day meeting today to decide whether to increase so-called quantitative easing from the current level of 375 billion pounds ($599 billion). The pound advanced to the strongest level in five weeks versus the euro.

“Gilts have rallied after confirmation of weak German industrial production underlined a weak euro-area macro outlook,” said Sam Hill, an interest-rate strategist at Royal Bank of Canada in London. “This follows the Obama re-election, which stabilizes expectations that existing U.S. monetary policy will be maintained. The combination has put a bid into less risky markets.”

The U.K. 10-year yield fell six basis points, or 0.06 percentage point, to 1.76 percent at 4:43 p.m. London time, after dropping to 1.75 percent, the lowest level since Oct. 15. The 1.75 percent bond due in September 2022 gained 0.505, or 5.05 pounds per 1,000-pound face amount, to 99.915.

German Production

Gilts rose after Germany’s Economy Ministry said industrial production dropped 1.8 percent in September after sliding 0.4 percent the previous month. Economists forecast a 0.7 percent decline, according to the median of 41 estimates in a Bloomberg News survey.

Gilts have returned 2.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.5 percent and U.S. Treasuries rose 1.8 percent.

The pound climbed 0.3 percent to 79.89 pence per euro after appreciating to 79.72 pence, the strongest since Oct. 1. Sterling slipped 0.1 percent to $1.5977.

President Obama prevailed over Republican nominee Mitt Romney to win re-election, becoming only the second Democrat since Franklin Delano Roosevelt to win another term. Romney said he wouldn’t reappoint central bank Chairman Ben S. Bernanke to a third term in 2014.

BOE Decision

The Bank of England’s nine-member Monetary Policy Committee, led by Governor Mervyn King, will maintain its target for asset purchases when it announces its decision tomorrow, according to 35 of 45 economists surveyed by Bloomberg News. Six forecast a 50 billion-pound increase and four predict a 25 billion-pound expansion, the survey showed.

The central bank will hold its main interest rate at a record-low 0.5 percent, according to all 55 economists in a separate survey.

The pound is poised to weaken to 82 pence per euro, according to Adrian Schmidt, a foreign-exchange strategist at Lloyds Banking Group Plc in London.

“At these levels, sterling is looking a little out of step with fundamental value,” he wrote in an e-mailed note. “This now looks like an opportunity to oppose sterling strength.”

The pound has gained 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 3.3 percent, and the dollar dropped 1.6 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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