Pound Rises, Gilt Yields Slip as U.K. Seen Shielded From Crisis
The pound strengthened versus most of its major counterparts and gilt yields slipped on bets the U.K. will remain insulated from the fiscal crises roiling the U.S. and the euro region.
Sterling gained versus all but two of its 16 major peers, including the dollar, and climbed most against New Zealand’s currency. The European Central Bank bought Spanish and Italian debt today, driving down the nations’ surging bond yields in a bid to stem the sovereign-debt crisis. The pound touched the highest level versus the dollar since June 1 after Standard & Poor’s downgraded the U.S. credit rating.
“The U.K. doesn’t have the same sovereign-debt issues that you have in Europe and the U.S.,” said Neil Jones, the head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “Over the long term, U.K. assets should retain their status as a relative safe haven. The government here has taken proactive measures to reduce the deficit.”
The pound gained 0.2 percent to 86.91 pence per euro as of 12:14 p.m. in London. It reached 86.43 pence on Aug. 5, the strongest since May 27. Sterling gained 0.1 percent to $1.6414, after touching $1.6478, and fell 0.7 percent to 127.59 yen.
Yields on 10-year gilts were less than one basis point lower at 2.68 percent after climbing as high as 2.77 percent earlier. Two-year note yields increased four basis points to 0.59 percent. They jumped as much as eight basis points to 0.63 percent, the steepest intraday rise in more than two months.
ECB Purchases
The ECB bought Italian and Spanish bonds today, six people with knowledge of the matter said, after last night pledging to “actively implement” its bond-purchase program.
“The debt crisis has helped drive gilt yields down quite a lot because the U.K. has been seen as a safe haven to the situation in the euro zone,” said Elisabeth Afseth, a fixed- income analyst at Evolution Securities Ltd. in London.
Benchmark 10-year gilt yields have slumped 72 basis points this year. Yields on the securities have also been driven lower as government spending cuts reduce prospects for economic growth, making interest-rate increases by the Bank of England less likely.
Prime Minister David Cameron’s government has embarked on the steepest government spending cuts since World War II to lower the fiscal deficit as bond investors demand higher yields to buy the debt of highly indebted nations. S&P lowered the U.S.’s AAA credit rating on Aug. 5 and kept its outlook “negative,” saying it was becoming less confident in lawmakers’ ability to tackle the deficit.
Job Sentiment
An index of sentiment toward U.K. employment prospects dropped 3 points from June to minus 53 in July, while a gauge of job security declined 1 point to minus 22, Lloyds Bank Corporate Markets said today.
“It’s a given that rates in the U.K. will stay lower for longer,” said Mizuho’s Jones.
The nine-member Monetary Policy Committee left the key rate at 0.5 percent last week and maintained its bond-purchase plan at 200 billion pounds ($327 billion) amid signs of a faltering economy. The U.K. economy grew just 0.2 percent in the second quarter, while manufacturing shrank in July.
Sterling has fallen 7.2 percent in the last 12 months, making it the worst performer among 10 developed-market currencies after the U.S. dollar, according to Bloomberg Correlation-Weighted Currency Indexes.
To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
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