Gilts Rally as Equity Market Losses Boost Demand for Relative Safer Assets

U.K. government bonds rose, pushing the 10-year gilt yield down for the first time in three days, as concern European nations will struggle to finance their deficits pushed stocks down and boosted demand for the safest assets.

The gains sent the two-year yield to the lowest in more than a month. The FTSE 100 Index of stocks lost 0.3 percent and the Stoxx Europe 600 Index declined for a sixth consecutive day. A report tomorrow may show U.K. services growth slowed, fueling speculation that the central bank will consider increasing asset purchases to boost the economy.

“People are wary of taking on risk” and are turning to government bonds, said Andy Chaytor, a rates strategist at Royal Bank of Scotland Plc in London. The services data “will be a key release for the U.K. and we’re seeing some positioning being put on. It’s an equity weakness story.”

The 10-year yield fell 3 basis points to 2.93 percent as of 4 p.m. in London. The 4.75 percent security maturing March 2020 increased 0.26, or 2.6 pounds per 1,000-pound ($1,584) face amount, to 114.86. The two-year yield fell 2 basis points to 0.63 percent, after dropping to the least since Aug. 31.

Gilts have gained 9.9 percent since the end of 2009, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. German government bonds earned 9.1 percent, while U.S. Treasuries returned 8.7 percent, the indexes.

Pound Steady

Government bonds rose and the pound fell this year amid speculation the Bank of England will keep its benchmark interest rate at a record low of 0.5 percent and maintain asset purchases to safeguard the recovery as the government cuts spending. Sterling lost 4.2 percent in 2009 against its developed- countries peers, according to Bloomberg Correlation-Weighted Currency Indexes.

The government will stick to its plan to wipe out most of the budget deficit to make sure the nation retains credibility with financial markets, Chancellor of the Exchequer George Osborne said.

“We will stick to our plans, deal with the debts and get the economy moving again,” he told Conservative Party supporters in Birmingham, England, today.

The pound was little changed at $1.5834 and was 0.9 percent stronger against the euro at 86.40 pence, after sliding to the weakest level since May 21.

A gauge of services activity probably dropped to 51 in September from 51.3 in August, according to the median prediction of 28 economists surveyed by Bloomberg. Bank of England policy maker Adam Posen said last week the central bank should restart its asset-purchase program to speed up growth.

“Quantitative easing will kick in, that theme will win the day and that’s one of the reasons to be bearish on the pound,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “Sterling is doing poorly.”

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net;

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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