The pound fell from a seven-week high against the dollar and 10-year gilts rose as concern that the pace of Chinese expansion may slow drove stock markets lower, curbing demand for assets perceived to be riskier. Sterling also fell against the yen after the Conference Board revised its leading economic index for China to show the smallest gain in five months in April, pushing the MSCI World Index of shares down 1.2 percent. Gilts extended gains after a report showed British banks approved fewer mortgages than economists forecast. The Treasury is selling 30-year bonds through banks today. “There’s a bit of risk aversion going on given negative news in the past 24 hours, and some investors are switching to safe currencies,” said Michael Derks, chief strategist in London at FXPro Financial Services Ltd., a foreign-exchange trader. The pound declined 0.2 percent to $1.5078 at 2:40 p.m. in London. One pound bought 133.83 yen, 0.9 percent fewer than yesterday. Sterling appreciated to less than 81 pence per euro for the first time since November 2008, trading 0.4 percent stronger at 80.99 pence. Britain’s currency has declined 6.7 percent against the dollar this year. It climbed 3.6 percent this month against the dollar, the second-best performer among the world’s most-traded currencies. It rose to $1.5129 yesterday, the highest level since May 6, as investors bet last week’s emergency budget and spending cuts will sustain Britain’s top credit rating without risking economic growth. The gains pared sterling’s drop this year against the dollar to 6.9 percent. “Our medium-term view is that the pound will hold up well,” Derks said. The fiscal consolidation plan by the government has been well-received by the market.” Gilt Gains The yield on the 10-year gilt fell two basis points to 3.36 percent, after sliding to 3.31 percent earlier, the lowest since April last year. The 4.75 percent security maturing in March 2020 rose 0.12, or 1.2 pounds per 1,000-pound face amount, to 111.44. Two-year note yields rose two basis points to 0.77 percent. Lenders granted 49,815 loans to buy homes, compared with 49,828 in April, the Bank of England said today in London. The median forecast of 17 economists in a Bloomberg News survey was for an increase to 51,000. U.K. government bonds outperformed German debt in the second quarter, handing investors a 4.24 percent gain, compared with a 4.01 percent return from their European counterparts, according to indexes compiled by Bank of America Merrill Lynch. Gilts returned 5.57 percent this year. The Debt Management Office is selling 8 billion pounds of 4.25 percent gilts maturing in December 2040 through banks today. The sale is its first so-called syndicated offering of regular bonds for the fiscal year starting April. ‘Deflation Hedge’ The bond will be priced to yield one basis point more than the gilts maturing in 2039. The sale has attracted orders in of 13.8 billion pounds, according to a banker involved in the transaction. “I can see it as a case for a deflation hedge for some investors given what’s going on in Europe,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London. “Concern earlier this year about a supply glut has also eased after the government cut spending, resulting in reduction on gilt issuance. These are positive backdrops for this long-dated bond sale.” U.K. Chancellor of the Exchequer George Osborne’s spending cuts helped to lower gilt sales for this fiscal year to 165 billion pounds, from 185.2 billion pounds envisaged in April. Britain sold an unprecedented 227.6 billion pounds of the securities in the previous 12 months. The yield on the existing 2039 gilts fell one basis point to 4.23 percent. To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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