Gilts Advance on Concern Greek Aid Talks Are Faltering

(Corrects maturity of bills in final paragraph.)

U.K. 10-year gilts rose, with yields falling the most in a week, as speculation that Greece’s efforts to win a second aid package are faltering boosted demand for safer assets.

The pound strengthened for the first time in four days against the euro after euro-area finance chiefs told Greek Finance Minister Evangelos Venizelos on the weekend that an increase in the bailout package wasn’t forthcoming. Gilts underperformed German bunds for a fourth day after traders reduced bets on the size of asset purchases the Bank of England may adopt when policy makers meet this week.

“It’s a global risk-off day,” said Vatsala Datta, an interest-rate strategist at Lloyds Bank Corporate Markets in London. “Gilts are following bunds, and slightly underperforming because of the nervousness ahead of the quantitative-easing” decision.

The 10-year gilt yield fell four basis points to 2.14 percent at 1:22 p.m. London time after dropping as much as six basis points, the most since Jan. 30. The 3.75 percent bond due September 2021 rose 0.355, or 3.55 pounds per 1,000-pound ($1,576) face amount to 113.88.

The extra yield investors demand to hold 10-year gilts instead of similar-maturity German bunds widened to 25 basis points from 18 basis points at the end of last month.

French President Nicolas Sarkozy met German Chancellor Angela Merkel in Paris today as Greece’s prime minister, Lucas Papademos and chiefs of the three parties supporting him sought to find consensus in Athens. “Time is running out,” Merkel said in a joint briefing with Sarkozy.

Positive Return

Gilts have handed investors a return of 18 percent over the past year as the European debt crisis worsened, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 11 percent.

The gain in gilts was tempered by speculation the Bank of England will announce fewer debt purchases than some analysts predicted when it meets Feb. 9

The Monetary Policy Committee raised the ceiling on the central bank’s bond purchases to 275 billion pounds in October, starting a round of buying that ended on Feb. 2. Policy makers will boost the program to 325 billion pounds this week, according to 34 of 50 economists in a Bloomberg News survey. Fifteen forecast a 75 billion-pound increase, and one no change.

Deutsche Bank AG lowered its estimate to 50 billion pounds from 75 billion pounds on Feb. 3 after surveys showed services and manufacturing activity improved.

House Prices

U.K. house prices rose for the first time in three months in January, Halifax said today. Prices increased 0.6 percent from December, the mortgage unit of Lloyds Banking Group Plc said. From a year earlier, they dropped 1.7 percent.

The pound appreciated 0.5 percent to 82.78 pence per euro, and dropped 0.4 percent to $1.5757.

Sterling has weakened 0.8 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar fell 2.4 percent, and the euro dropped 1.6 percent.

The pound may decline more than 3.5 percent against the dollar over the next month should it fall below a level of support, Societe Generale SA said, citing trading patterns. The currency may drop to $1.5170 after failing to advance through a level of resistance at $1.5885, technical strategists Hugues Naka and Fabien Manac’h wrote.

Gilts have lost 0.2 percent this year after volatility was taken into account, according to Bloomberg risk-adjusted return rankings. The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns are not annualized.

The U.K. plans to auction 4 billion pounds of bonds due 2017 tomorrow, as well as 3.5 billion pounds of 28-, 91- and 182-day bills on Feb. 10.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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

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