Pound Drops, 10-Year Gilt Yield Falls to Record on Economic Growth Concern
The pound fell to the lowest level in almost two weeks against the dollar and gilt yields slid to a record after data showed U.K. construction weakened amid mounting concern U.S. spending cuts may stifle global growth.
Sterling depreciated to an all-time low against the Swiss franc. A gauge of British building activity slipped to 53.5 from 53.6 in June, Markit Economics Ltd. and the Chartered Institute of Purchasing and Supply said today. Manufacturing unexpectedly shrank the most in more than two years last month a report yesterday showed.
“We are finally seeing the gloomy state of U.K. fundamentals,” said Jane Foley, a senior foreign-exchange strategist at Rabobank International in London. “The pound benefited before from the dual crisis in the U.S. and euro area as the best of a bad bunch. The market is now reacting to the weaker manufacturing data.”
The pound was little changed at $1.6281 as of 4:27 p.m. in London. It dropped 0.4 percent to $1.6225 earlier, the lowest level since July 21. The British currency weakened as much as 1.8 percent to 1.2546 Swiss francs. Sterling strengthened 0.2 percent to 87.26 pence per euro.
A gauge of U.K. factory output fell to 49.1, the lowest level since June 2009, from 51.4 the previous month, a report by Markit Economics and CIPS showed yesterday.
The Confederation of British Industry cut its growth forecast for the U.K. economy yesterday after gross domestic product barely grew in the second quarter. The U.K. will expand 1.3 percent this year, compared with an estimate of 1.7 percent in May, the country’s biggest employers’ group said in a quarterly forecast. The CBI’s growth prediction for 2012 is unchanged at 2.2 percent.
U.S. Vote
The U.S. House of Representatives yesterday voted to approve measures that threaten automatic reductions to enforce a goal of cutting spending by $2.4 trillion over the next decade.
Sterling has fallen 9 percent in the last 12 months, making it the second-worst performer among 10 developed-market currencies, after the U.S. dollar, according to Bloomberg Correlation-Weighted Indexes.
The 10-year gilt yield fell three basis points to 2.78 percent, after reaching a record low of 2.76 percent. The 3.75 percent security due September 2020 rose 0.23, or 2.3 pounds per 1,000-pound ($1,628) face amount, to 107.775. The two-year gilt yield rose two basis points to 0.63 percent, after falling to 0.59 percent, the least since Oct. 22.
Growth Concern
“Ten-year yields reached record levels on concerns over the outlook for growth,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “We had disappointing U.K. and U.S. manufacturing surveys yesterday, adding to nervousness about the global economy. Investors remain nervous towards equities, choosing the safe haven of government bonds, including gilts.”
Manufacturing in the U.S. almost stalled in July, threatening to deprive the two-year recovery of one of its main drivers. The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said yesterday. The July index was lower than the most pessimistic forecast in a Bloomberg News survey.
Gilts have handed investors 5.7 percent this year, compared with 3.4 percent for German bunds and 4.6 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Bond Auctions
The U.K. Debt Management Office sold 2 billion pounds of 4.5 percent gilts maturing in September 2034 at an average yield of 3.955 percent today.
Investors bid for 2.23 times the amount offered, agency data showed. That compares with a so-called bid-to-cover ratio of 1.53 at the previous auction of the same securities held Nov. 11, which were sold at an average yield of 4.194 percent.
The debt office said it plans to sell 825 million pounds of index-linked gilts due in November 2042 on Aug. 11.
Bank of England policy makers meet to set interest rates in two days. They will keep the benchmark rate unchanged at 0.5 percent, according to all 55 economists in a Bloomberg survey. The Bank of England will probably hold its bond-purchase program at 200 billion pounds, according to a separate survey.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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