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U.K. Gilts Fall on Greek Debt, U.S. Fiscal-Cliff Deal Optimism

November 19, 2012

U.K. 10-year government bonds fell, snapping a two-day gain, amid optimism that European Union finance ministers will come to an agreement on Greece’s debt, damping demand for the relative safety of gilts.

Sterling weakened against all but two of its 16 major peers before the Bank of England publishes minutes of its November policy meeting in two days. The central bank voted to end its program of asset purchases at 375 billion pounds ($597 billion) at the Nov. 7-8 gathering. Gilts declined with Treasuries and stocks gained as speculation U.S. lawmakers will forge a deal to avert the so-called fiscal cliff boosted demand for higher- yielding assets.

“Risk appetite generally improved and that’s why we see some sell-off in safe assets today, including gilts,” said Nick Stamenkovic, a rates strategist at RIA Capital Markets Ltd. in Edinburgh. “Our longer-term view is that inflation in the U.K. will be sticky, and that poses risk for gilt investors.”

The yield on 10-year gilts climbed four basis points, or 0.04 percentage point, to 1.77 percent at 4:48 p.m. London time. The 1.75 percent bond due September 2022 dropped 0.39, or 3.90 pounds per 1,000-pound face amount, to 99.78. The two-year yield rose two basis points to 0.27 percent.

European finance ministers meet in Brussels tomorrow for the second time in a week after they agreed seven days ago to keep Greece’s bailout aid flowing. The euro rose against the dollar, the pound and the yen on speculation that the ministers will agree to divest Greece’s next payment.

Obama Confident

U.S. President Barack Obama said he was “confident” that an agreement would be reached over the triggering of automatic spending cuts and tax increases at year-end that may push the economy into recession. House Speaker John Boehner said opposition Republicans are willing to put revenue on the table in exchange for spending cuts after Nov. 16 discussions with Obama, which he called “constructive.”

Five-year gilt yields rose three basis points to 0.79 percent, after rising to 0.8 percent, the most since Nov. 5. The Debt Management Office is scheduled to auction 4.5 billion pounds of 1 percent securities due in 2017 tomorrow. The debt office also plans to sell index-linked bonds maturing in 2044 through banks this week. Bank of America Corp., Deutsche Bank AG, HSBC Holdings Plc and Nomura International Plc were hired to lead the sale, the DMO said.

The sales are part of the 164.4 billion pounds the debt office has planned to raise for the government in the 2012-2013 fiscal year, which started in April.

Safe-Haven Flows

Gilts returned 3.5 percent this year through Nov. 16, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4 percent and U.S. Treasuries rose 2.8 percent.

The pound gained 0.2 percent to $1.5912 after dropping to $1.5829 on Nov. 15, the lowest level since Sept. 5. Sterling fell 0.4 percent to 80.51 pence per euro. It depreciated to 80.65 pence on Nov. 15, the weakest since Oct. 31.

The U.K. currency has gained 1.2 percent this year, the fourth-best performer among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro declined 2.7 percent and the dollar dropped 1.4 percent.

“Sterling has picked up some safe-haven and property inflows, which help to make it resilient,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Our view is that the pound remains vulnerable because of weak U.K. fundamentals, and we are a seller on a rally.”

London home prices increased 1.2 percent this month, while they dropped 2.6 percent for the nation as a whole, according to Rightmove Plc (RMV), the operator of Britain’s biggest property website.

Bank of England policy maker David Miles said today there is more the central bank can do to boost growth if the recessionary conditions gripping the U.K. economy persist. Governor Mervyn King gave a gloomy assessment of the economy last week, saying gross domestic product may shrink in the current quarter and the road to recovery will be “long and winding.”

To contact the reporter on this story: Anchalee Worrachate in London at

To contact the editor responsible for this story: Paul Dobson at

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