Gilts Decline as Speculation of ECB Bond-Market Support Saps Safety Demand

U.K. government bonds fell as gains in stock markets and speculation the European Central Bank may take additional steps to contain the sovereign-debt crisis reduced the appeal of British assets as a haven.

Ten-year gilts snapped three days of gains as a report showed faster-than-forecast British manufacturing growth this month. European Central Bank President Jean-Claude Trichet yesterday signalled that investors are underestimating his institution’s determination to bolster financial stability. The benchmark FTSE 100 Index of stocks gained 2.2 percent, rising for the first time since Nov. 25.

“There’s still appetite for risk,” said Matteo Regesta, an interest-rate strategist at BNP Paribas SA in London. “There was a strong rally in gilts yesterday, so it’s no wonder” investors are reducing their positions today, he said.

The 10-year gilt yield gained 13 basis points to 3.36 percent at 4:40 p.m. in London. The two-year gilt yield rose eight basis points to 0.98 percent, after falling as much as nine basis points yesterday to the least since Nov. 10. The 4.5 percent security maturing March 2013 fell 0.19 or 1.9 pounds per 1,000-pound ($1,562) face amount, to 107.85.

German bunds, perceived to be the safest securities in Europe, also dropped as a report showed the country’s retail sales jumped in October by the most in almost three years.

The pound lost 0.8 percent to 84.911 pence per euro and was little changed at $1.5568.

Trichet Comments

The ECB’s Governing Council will meet tomorrow amid speculation it will again delay exiting emergency liquidity measures. All 52 economists surveyed by Bloomberg expect the central bank to leave its key interest rate unchanged at 1 percent.

“I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers in Brussels yesterday.

Gilts outperformed their European counterparts and the pound advanced against the euro this week as Ireland’s 85 billion-euro ($111 billion) aid package failed to ease concern that the euro-area’s debt crisis will worsen.

The extra yield, or spread, investors demand to hold 10- year gilts instead of similar maturity bunds narrowed to 59 basis points today. It dropped to 55 basis points yesterday, the least since Oct.26.

The 10-year Italian bond yield fell 17 basis points to 4.53 percent today, narrowing the yield premium investors demand to hold the securities instead of benchmark bunds to 173 basis points. The yield on similar-maturity Spanish debt fell 24 basis points to 5.29 percent, narrowing the yield spread to 251 basis points from 283 basis points.

British Manufacturing

Britain’s currency has gained 0.1 percent in the past month, compared with a 3.3 percent decline by the euro, according to Bloomberg Correlation-Weighted Currency Indexes, which track the performance of a basket of 10 currencies.

An index of U.K. manufacturing growth rose to 58 in November from 55.4 the previous month, Markit Economics and the Chartered Institute of Purchasing and Supply said in a statement in London today. That was the highest reading since May. A measure above 50 indicates expansion.

Losses by gilts may be limited as other data signals the U.K. economic recovery is losing steam, making it likely the central bank will keep its main interest rate at a record low and maintain its asset-buying program at 200 billion pounds.

The average price of a U.K. home dropped by 0.3 percent in November, a report by Nationwide Building Society showed. From a year earlier, prices increased 0.4 percent, slowing from 1.4 percent growth in October, the nation’s biggest customer-owned lender said in an e-mailed statement today.

“We expect gilts to make further significant gains in early 2011 as the economy starts to face stronger headwinds,” David Page, fixed-income strategists at Lloyds TSB Corporate Markets in London, wrote in a note today.

To contact the reporter 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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