Thirty-Year Gilt Yields Reach Record Low on Recession Concern; Pound Falls

Thirty-year gilt yields fell to a record low as France lost its top credit rating and a survey showed the U.K. housing market remains weak, boosting demand for haven assets.

The yield spread between two- and 10-year gilts was the narrowest in almost three years amid concern growth is slowing. A survey by Rightmove Plc showed U.K. home sellers cut asking prices for a third month in January. Sterling was 0.5 percent from its lowest level versus the dollar in almost 18 months as Ernst & Young LLP’s ITEM Club said the U.K. economy has slipped back into a recession. Standard & Poor’s cut France’s credit rating by one step to AA+ and lowered grades for eight other euro-area nations.

“Gilt yields are reflecting a flight to quality and expectations that economic growth in the U.K. will remain subdued for a while,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “There is no reason to believe these downgrades in the euro area are the end of the line in terms of things getting worse over there.”

Thirty-year yields fell three basis points to 2.976 percent, the lowest since Bloomberg began collecting gilt data in 1996, and were at 2.99 percent at 4:04 p.m. London time. The 4.25 percent securities maturing in December 2040 rose 0.38, or 3.8 pounds per 1,000-pound ($1,531) face amount, to 124.33.

Ten-year gilts were little changed, leaving yields at 1.97 percent. The rate was 158 basis points more than two-year notes, the narrowest spread since March 2009. The so-called flattening of the yield curve suggests investors favor longer-dated maturities as slower growth reduces inflation.

S&P Cuts

U.S. equity and bond markets are closed today for the Martin Luther King Jr. holiday.

S&P said on Jan. 13 that Europe’s efforts to fight its crisis are falling short as it lowered ratings for Spain and Italy by two steps and France and Austria one level. France sold 8.6 billion euros ($11 billion) in bills today. The company affirmed Britain’s AAA rating on Oct. 3, saying it expects the coalition government led by Prime Minister David Cameron to enact “the bulk” of its plan to reduce the budget deficit.

“To be sure, the U.K. suffers from some of the adverse factors cited by S&P to justify the euro-area downgrades,” London-based Citigroup Inc. analysts Michael Saunders and Mark Schofield said in a note to clients today. “Nevertheless, in other respects, we think the U.K.’s ability to return to fiscal sustainability is significantly better than most” euro-region governments.

Sterling Falls

The pound dropped 0.4 percent to 117.48 yen, extending three weeks of declines. It was little changed at $1.5306 after falling to $1.5235 on Jan. 13, the weakest level since July 2010. Sterling was also little changed at 82.736 pence per euro.

Futures (.BPLRG) traders increased their bets that the British pound will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain -- so-called net shorts -- was 35,853 on Jan. 10, compared with 31,899 a week earlier.

“We’ve seen some flight to quality that benefits the dollar and the yen against most currencies including the pound,” said Jeremy Stretch, the head of currency strategy at Canadian Imperial Bank of Commerce in London. “The pound is likely to fall further against the dollar given its economic outlook. But we still prefer sterling to the euro.”

U.K. Recession

Ernst & Young’s ITEM Club cut its forecast for economic expansion in 2012 to 0.2 percent from 1.5 percent today. It predicted the Bank of England will increase its bond-purchase target in February to counter the impact of Europe’s sovereign debt crisis.

The report by Rightmove showed average asking prices for homes in England and Wales fell 0.8 percent from December, the operator of Britain’s biggest property website said. In London, values gained 0.8 percent.

Gilts handed investors a 0.4 percent return so far this year, compared with a 0.4 percent gain from German bonds and a 0.1 percent increase from Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Sterling declined 0.8 percent against nine developed-nation currencies since the start of the year, according to Bloomberg Correlation-Weighted Indexes. The New Zealand dollar, which gained 3.1 percent during the same period, was the best performer while the euro was the worst currency, dropping 1.7 percent.

To contact the reporter on this story: 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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