Bloomberg News

Pound Declines as Gilts Advance on World Bank Downgrade

January 16, 2013

The pound dropped to a seven-week low against the dollar as the World Bank cut its global growth forecast for this year, spurring demand for the safest assets.

U.K. government bonds advanced for a fourth day, the longest run since September. Sterling approached its weakest level in nine months against the euro as Prime Minister David Cameron prepared to outline his plans on repatriating powers from the European Union. The yield on 10-year index-linked bonds fell to a record before the government sells inflation-protected securities tomorrow.

“There’s obviously ongoing uncertainty regarding the economic environment in the U.K.,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “There’s probably some residual concerns overhanging the state of play with the U.K. within Europe as well. It’s tough to make anything other than a fairly negative pitch for the short-term outlook for sterling.”

The pound fell 0.4 percent to $1.6006 at 5:05 p.m. London time for a fourth day of declines and the longest losing streak since November. It dropped as low as $1.5976, the least since Nov. 28. Sterling depreciated 0.4 percent to 83.13 pence per euro. It traded at 83.26 pence on Jan. 14, the weakest since April 3.

The yield on the 10-year gilt declined three basis points, or 0.03 percentage point, to 2 percent after falling to 1.98 percent, the lowest level since Jan. 3. The 1.75 percent security maturing in September 2022 rose 0.21, or 2.10 pounds per 1,000-pound face amount, to 97.83.

Sterling Falls

The Washington-based World Bank yesterday projected the global economy will expand 2.4 percent in 2013, down from a June forecast of 3 percent, after growing 2.3 percent in 2012.

“Markets are getting ahead of themselves -- talking themselves into more optimistic scenarios of global economic recovery,” said Marchel Alexandrovich, a London-based senior economist at Jefferies International Ltd., one of the financial institutions that deal directly with the Debt Management Office in the gilt market. “Yields in gilts have recently risen because of that. They are likely to adjust lower as data shows recovery may not be as solid as some are expecting.”

Cameron’s desire to renegotiate Britain’s European Union membership may cause “the corporate investment climate” to suffer, according to foreign-exchange analysts at Morgan Stanley. Lloyds Banking Group Plc said it will require “something significant” to push the pound through potential orders to buy the currency at 1.20 euros.

Fish, Chips

The pound declined against all 16 of its major peers as Cameron, speaking in parliament, dismissed as a “false choice” calls from members of his Conservative Party for an early vote on leaving the 27-nation EU. He will outline his plans in a speech in the Netherlands on Jan. 18.

Finnish Prime Minister Jyrki Katainen today evoked British fast-food preferences in an appeal for the U.K. to remain part of the bloc, describing the union without Britain as “pretty much the same as fish without chips. It’s not a meal anymore.”

The British currency has weakened 1.7 percent this year, the third-worst performance after the yen and Swiss franc, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies.

The yield on 10-year index-linked bonds fell six basis points to minus 1.07 percent after reaching minus 1.08 percent, the lowest since Bloomberg started collecting the data in 1992. The securities pay investors based on changes in the retail- price index.

The U.K. is scheduled to auction 1 billion pounds of inflation-linked debt due in 2029 tomorrow. Index-linked securities outperformed nominal gilts, gaining 1.73 percent this year through yesterday, while conventional gilts lost 1.4 percent, according to Bank of America Merrill Lynch.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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


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