British Gilts Gain After Euro Divisions on Bailout Boost Safety Demand

British government bonds rose amid speculation divisions among European officials over steps needed to solve the sovereign-debt crisis will boost demand for U.K. assets as a haven.

The gains pushed the 10-year yield down for the first time since Nov. 30 as investors anticipated the Bank of England will keep its main interest rate at a record low this week. Gilts also rose with Treasuries after Federal Reserve Chairman Ben S. Bernanke said the central bank may boost purchases of securities, making fixed-income assets more attractive. German Chancellor Angela Merkel rebuffed pleas from Belgium and central bankers to boost the emergency fund to save countries such as Portugal and Spain from falling prey to speculation.

“The alternatives to gilts don’t look compelling at all,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. The euro-area’s debt crisis “will stop people allocating away from gilts, and that in part is supporting the U.K. market.”

The 10-year U.K. bond yield declined two basis points to 3.40 percent at 4:43 p.m. in London, after increasing 20 basis points in the previous three trading days. The 4.75 percent security maturing March 2020 gained 0.16 or 1.6 pounds per 1,000-pound ($1,569) face amount, to 110.67. The two-year gilt yield dropped two basis points to 1 percent.

The pound lost 0.7 percent to $1.5674 and was 0.4 percent stronger against the euro at 84.67 pence.

Brussels Meeting

European policy makers are meeting in Brussels today amid concern their rescue fund may not be large enough to stop contagion spreading from Greece and Ireland to countries such as Spain. While French President Nicolas Sarkozy and Merkel last month rejected expanding the fund, European Central Bank President Jean-Claude Trichet on Dec. 3 indicated governments should consider such a move. The political discord pushed down bonds in Spain and Portugal today.

U.K. government securities outperformed their counterparts from the 16 nations that share the euro amid concern that the region’s debt crisis will spread to bigger economies. Gilts have made 0.4 percent since the end of June, compared with a 0.5 percent decline by euro-area government securities, according to indexes developed by Bank of America Corp’s Merrill Lynch unit.

Ten-year gilts today yielded 55 basis points more than similar maturity German bunds, the European benchmark government paper, down from 68 basis points two weeks ago. The spread has narrowed from 103 basis points on May 7.

Default Swaps

Italy and Spain led an increase in the cost of insuring bonds sold by Europe’s peripheral nations, according to CMA prices for credit-default swaps. The Spanish 10-year yield was 15 basis points higher at 5.23 percent, while the yield on similar-maturity Italian bonds increased eight basis points to 4.52 percent. Portugal’s 10-year yield rose one basis point to 6.09 percent.

Gilts have also been supported by data signaling the economic recovery may stall, making it less likely the Bank of England will raise rates even as inflation stays above its target.

A report tomorrow will probably show industrial production growth slowed in October to 0.3 percent from 0.4 percent the previous month, according to the median prediction of 26 economists polled by Bloomberg. Manufacturing and construction growth unexpectedly fell in November, reports showed last week.

‘Deterioration’

“We continue to suggest that outright gains in gilts from here are likely to follow a deterioration of the economic outlook in 2011,” analysts led by Charles Diebel, head of market strategy at Lloyds TSB Corporate Bank in London, wrote in a client note today.

The U.K. government may cut gilt sales by almost 4 percent in the next fiscal year, according to Barclays Capital, the investment banking unit of Britain’s third-biggest lender.

The government may sell 159 billion pounds of bonds in the year through March 2012, down from a projected 165.2 billion pounds in the current fiscal year, Moyeen Islam, a fixed-income strategist in London, wrote in an investor note dated Dec. 3. Inflation-linked bonds may account for about 20 percent of issuances, he wrote.

The government is scheduled to 2 billion pounds of bonds maturing in 2049 tomorrow. The securities were little changed today, leaving the yield at 4.33 percent.

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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