BLBG: Pound Drops a Third Day, Gilts Rise as Risk Appetite Evaporates
The pound slid against the dollar for a third day and gilts climbed on concern the U.K. economic slump is deepening, sapping demand for riskier assets such as stocks.
The British currency also dropped against the yen as the benchmark FTSE 100 Index of stocks fell 1.7 percent. Two-year gilt yields headed for their biggest two-day decline since Black Wednesday after Bank of England Governor Mervyn King said yesterday the economy is in a “deep recession” that may prompt policy makers to keep cutting interest rates and pump money into the financial system.
“The downside risk for the pound has increased,” said Lee Hardman, a currency economist in London at Bank of Tokyo- Mitsubishi UFJ Ltd. “The Bank of England made it clear we have a serious economic problem, and they’re moving toward quantitative easing. Although their measures will eventually help the pound, the sentiment toward the currency should remain negative in the near term.”
The pound dropped 1.2 percent to $1.4223 as of 3:13 p.m. in London and 1.8 percent to 128.32 yen. It was little changed against the euro at 89.86 pence. The currency will depreciate to $1.35 in the next three months, according to Hardman.
The pound’s trade-weighted index, a gauge of its performance against currencies of Britain’s trading partners including the yen, Swiss franc, euro and dollar, declined 2.9 percent this week to 74.04.
Steepest Curve
The yield on the two-year gilt slid 16 basis points to 1.17 percent, after losing 31 basis points yesterday. The yield hasn’t dropped so much in two days since Sept. 18, 1992, the week the U.K. was driven out of Europe’s Exchange Rate Mechanism.
The price of the 4.25 percent security due March 2011 climbed 0.34 today, or 3.4 pounds per 1,000-pound ($1,421) face amount, to 106.30.
The gain in the two-year gilt pushed the yield difference, or spread, with the 10-year note to 230 basis points, the widest since Bloomberg started compiling the data in January 1992. The yield on the 10-year note fell 15 basis points to 3.46 percent.
The Bank of England yesterday cut its forecasts for U.K. gross domestic product and inflation and said the risks to economic growth are “heavily to the downside.” Loans for house purchases fell last year to the lowest level since 1974, declining an annual 49 percent to 516,000, the Council of Mortgage Lenders said today.
The pound may fall further in the near-term after King said interest-rate cuts and a weaker currency will give a boost to the economy, according to Neil Jones, head of hedge fund sales in London at Mizuho Corporate Bank.
‘Welcome Weak Pound’
A government report on Feb. 10 showed the nation’s trade deficit shrank in December to the smallest in 18 months as the currency’s decline bolstered exports.
“The Bank of England welcomes a weak pound to an extent,” said Jones. “That’s a reverse intervention. We expect sterling to underperform other major currencies.”
The London interbank offered rate, or Libor, that banks say they charge each other for overnight loans in pounds fell to less than 1 percent for the first time amid speculation U.K. policy makers will follow their counterparts in the U.S. and Japan by cutting interest rates to near zero. The Libor slipped more than half a basis point to 99 basis points today, the British Bankers’ Association said.
The central bank will lower the key interest rate to 0.5 percent by the end of the first quarter, from 1 percent currently, according to the median forecast of 35 economists in a Bloomberg survey.
Bond Returns
Investors should sell the euro against the pound if the European currency strengthens to 92 pence, Barclays Plc said.
There may be “downside for the pound in the near term,” a team of Barclays Capital strategists led by London-based David Woo wrote in a report today. “It doesn’t change our view that too much bad news is priced into the U.K. relative to the euro zone.”
Britain’s Treasury sold 1.1 billion pounds of inflation- protected debt today. The average yield was 1.310 percent and investors bid for 1.57 times the securities offered, the highest so-called bid-to-cover ratio for the securities since May 2007.
Gilts handed investors a 2.5 percent loss this year, compared with a decline of 0.2 percent for German debt and a 2.40 percent loss from U.S. Treasuries, according to Merrill Lynch & Co.’s U.K. Gilts, Federal German Governments and U.S. Treasury Master indexes.
