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U.K. Bond Yields Fall to Records on Greek Default Speculation; Pound Drops

U.K. 10-year bonds jumped, driving yields to an all-time low, as stock-market losses and speculation Germany is preparing for a Greek default fueled demand for the perceived safety of government debt.

Two-year yields also slid to a record, falling below 0.50 percent. The Stoxx Europe 600 Index sank 2.4 percent, after sliding 3.7 percent last week. Gilts have risen with German bunds and U.S. Treasuries amid mounting concern that divisions among euro-area policy makers are thwarting efforts to solve the region’s debt crisis and avert a Greek default. The pound weakened for a third day against the dollar.

“The markets are really getting nervous and we’re seeing moves from risky markets,” said Allan von Mehren, chief fixed- income strategist at Danske Bank A/S in Copenhagen. “Gilts are still AAA rated and are still going to be considered among the safest bond markets.”

The 10-year gilt yield slid five basis points to 2.21 percent at 4:22 p.m. in London, after reaching 2.18 percent, the lowest since at least January 1989, when Bloomberg started collecting the data. The 3.75 percent bond due September 2020 rose 0.465, or 4.65 pounds per 1,000-pound ($1,586) face amount, to 112.525. Two-year yields were little changed at 0.54 percent, after retreating to 0.49 percent.

The pound fell 0.4 percent to $1.5817 and was 0.2 percent weaker at 86.19 pence per euro, after appreciating 0.8 percent to 85.30 pence, the strongest level since March 3.

Refuge Bid

Gilts have returned almost 3 percent this month, compared with 2.7 percent for German government bonds and 1.4 percent for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

British government debt outperformed as investors sought refuge from the euro area’s debt crisis and on speculation the Bank of England will keep its benchmark interest rate at a record low as the economic recovery falters. Policy makers kept the rate at 0.5 percent last week and maintained the asset- purchase program at 200 billion pounds.

Bonds of Europe’s most indebted countries fell today amid concern the debt crisis is intensifying as growth slows. German two- and 10-year yields dropped to record lows today. The euro is under “existential threat,” Nobel laureate economist Paul Krugman wrote in the New York Times today.

Reports tomorrow will show that U.K. house-price declines accelerated in August while the inflation rate quickened to 4.5 percent, more than twice the central bank’s 2 percent target, according to Bloomberg surveys of economists. The government is scheduled to release jobless claims data on Sept. 14.

Spread Narrows

The extra yield, or spread, investors demand to hold 10- year gilts instead of two-year notes narrowed six basis points to 166 basis points, the least since March 2009. Declining spreads signal investor preference for longer-dated securities, which are more sensitive to the outlook for inflation. The securities with shorter maturities react more to expected changes in interest rates.

The pound has depreciated 5.3 percent in the past 12 months against a basket of nine major peers, the second-worst performer after the dollar, which fell 8.4 percent, according to Bloomberg Correlation-Weighted Currency Indexes.

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

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

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