Bloomberg News

U.K. Gilts Fall as Mortgage Approvals Rise; Pound Drops

January 30, 2013

U.K. government bonds fell, with 30- year yields climbing to the highest level since April, after a report showing mortgage approvals increased in December reduced demand for fixed-income securities.

Benchmark 10-year gilts dropped for the fourth time in five days amid signs the Bank of England’s efforts to spur growth, including its Funding for Lending Scheme to encourage banks to offer more loans, are helping spur an economic recovery. The pound weakened to a 13-month low against the euro after European economic confidence improved.

“I stick with the view that gilt yields are going higher with a resurgence of risk appetite, which is playing into the negative gilts theme,” said Jason Simpson, a rates strategist at Banco Santander SA in London. “The lending numbers that came out today were above consensus, suggesting credit conditions continue to improve. Some of this will have been due to the Funding for Lending Scheme.”

The 30-year gilt yield rose two basis points, or 0.02 percentage point, to 3.35 percent at 4:14 p.m. in London after climbing to 3.36 percent, the highest level since April 24. The 4.5 percent bond due in December 2042 fell 0.415, or 4.15 pounds per 1,000-pound face amount, to 121.63. The 10-year yield increased to 2.13 percent, the most since Jan. 4.

Gilts have handed investors a loss of 2 percent this month through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 1.9 percent and Treasuries fell 1 percent.

Mortgage Approvals

U.K. lenders granted 55,785 mortgages last month, the most since January 2012, the Bank of England said in London. House prices rose 0.22 percent in January, after falling 0.1 percent the previous month, according to a Bloomberg News survey before Nationwide Building Society releases the report tomorrow.

The central bank and the Treasury introduced the Funding for Lending Scheme in July to avoid a forecast decline in bank lending during the subsequent 18 months. The program encourages banks to boost lending by providing them with funding for an extended period at below-market rates.

The pound weakened against the euro as signs Europe’s economy is improving boosted the single currency against most of its major counterparts.

An index of European executive and consumer sentiment rose to 89.2 this month, the highest since June, the European Commission said in Brussels. The data added to evidence the 17- nation currency bloc may be emerging from recession.

Sterling dropped 0.5 percent to 85.98 pence per euro after depreciating to 86.07 pence, the weakest since Dec. 7, 2011. The U.K. currency gained 0.2 percent to $1.5791.

Manufacturing Data

A report this week will show U.K. manufacturing grew at a slower pace in January, a Bloomberg survey showed before the data is published on Feb. 1. Data last week showed Britain’s economy contracted 0.3 percent in the final quarter of 2012, raising the prospect of a triple-dip recession.

The pound “remains vulnerable given the recent streak of negative data surprises combined with the ongoing decline in the euro credit-risk premium,” analysts at Credit Suisse Group AG, including London-based Aditya Bagaria, wrote in an e-mailed note today. The bank forecasts the pound will depreciate to 89 pence per euro this year, data compiled by Bloomberg show.

The pound has weakened 3.3 percent this year, the second- worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 3 percent and the dollar dropped 0.2 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

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


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