BLBG:U.K. Gilts Fall, Pound Drops as Spain’s Borrowing Costs Decline
U.K. government bonds declined and sterling fell against the euro as Spain sold Treasury bills at lower rates even after its credit rating was cut two steps by Standard & Poor’s last week.
Two-year yields rose for a second day as stocks advanced, damping demand for the safest assets. Spain sold 12-month bills at an average yield of 2.049 percent, compared with 4.05 percent at an auction last month and the rate for its 18-month bills dropped to 2.399 percent from 4.226 percent in December. The MSCI World Index climbed 0.7 percent while the FTSE 100 Index of shares added 0.9 percent.
“The market is driven by risk-on sentiment on the back of stock gains and successful Spanish bill sales, and these factors are pushing gilt yields higher,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “We don’t think the poor fundamentals of these peripheral nations have changed. These risk-on moves could be temporary.”
Ten-year yields rose three basis points, or 0.03 percentage point, to 2 percent as of 11:57 a.m. London time. The 3.75 percent securities maturing in September 2021 fell 0.28, or 2.8 pounds per 1,000-pound ($1,538) face amount, to 115.285. Two- year yields climbed four basis points to 0.43 percent.
Thirty-year yields matched a record low of 2.976 percent before rising two basis points to 3 percent.
Yield Curve
Sterling weakened 0.5 percent to 83.09 pence per euro, snapping two days of gains. It rose 0.4 percent to $1.5382 as stock gains reduced demand for the safety of the U.S. currency.
Gilts returned 0.5 percent this year through yesterday, including reinvested interest, compared with a gain of 0.4 percent for German government bonds and 0.2 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
The yield spread between two- and 10-year gilts was the narrowest in almost three years after a report showed price growth in the U.K. eased to its slowest in six months. The yield difference between the two securities was at 158 basis points, the least since March 2009. The so-called flattening of the yield curve suggests investors favor longer-dated maturities as inflation decelerates.
Consumer prices rose an annual 4.2 percent compared with 4.8 percent in November, the Office for National Statistics said today in London. The 10-year break-even rate, a market gauge of inflation expectations derived from the yield difference between regular and index-linked bonds, dropped to 2.65 percentage points, the lowest level in nearly two weeks before trading at 2.68 percentage points.
Quantitative Easing
The Bank of England forecasts inflation will slow this year, providing relief to consumers as the European sovereign debt crisis and rising unemployment weigh on the recovery. Accountancy firm Ernst & Young LLP said yesterday a second recession may already be underway.
Sterling also fell against higher-yielding currencies, with the pound declining as much as 1 percent to A$1.4713, its lowest level versus the Australian dollar since 1985.
The Bank of England kept its asset-purchase program, known as quantitative easing, at 275 billion pounds on Jan. 12 and left its main interest rate at a record low 0.5 percent.
“The market seems to be raising bets that the Bank of England will expand its quantitative easing program next month to support the economy, and a weaker inflation number will bolster that view,” said Geoffrey Yu, a currency strategist at UBS AG in London. “More liquidity in the market will keep pressure on the pound.”
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net;
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
