Gilts Climb on European Debt Turmoil as Pound Strengthens

U.K. 10-year gilts rose for the first time in five days as investors sought the safety of British debt on concern political turmoil in the Netherlands and French elections may disrupt efforts to stem the debt crisis.

The pound climbed to the strongest level in 20 months against the euro after Socialist challenger Francois Hollande progressed to the final round of the French presidential election ahead of incumbent Nicolas Sarkozy. The Netherlands faces early elections after one of the parties in the minority ruling coalition withdrew. Sterling rose against most of its 16 major peers.

“It will remain the European story that drives gilts,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “You’ve got all the usual spreads quite a lot wider, including France after the election, and things in the Netherlands are being stirred up as well. It’s the benefit of not being part of it” that is supporting gilts, she said.

U.K. 10-year bond yields fell five basis points to 2.12 percent at 4:25 p.m. London time. The yield slid as much as eight basis points, the biggest intraday drop since April 10. The 4 percent security due March 2022 rose 0.505, or 5.05 pounds per 1,000-pound ($1,610) face amount, to 116.630.

German 10-year bunds rose, pushing the yield on the securities to a euro-era record low 1.633 percent today. Similar-maturity Dutch bonds slid, pushing the yield difference, or spread, between the two to a three-year high.

European Elections

Dutch Prime Minister Mark Rutte offered to quit, a move that would trigger elections, as he sought to win parliamentary support for additional budget cuts after the minority government lost the support of the Freedom Party.

In France, Hollande took 28.6 percent of the vote against 27.1 percent for Sarkozy, the Interior Ministry said. The second round of voting takes place on May 6.

The pound appreciated 0.5 percent to 81.57 pence per euro and reached 81.49 pence, the strongest level since August 2010. Sterling was 0.2 percent weaker at $1.6097. It touched $1.6149 on April 20, the most since Oct. 31.

U.K. Chief Secretary to the Treasury Danny Alexander said today that government departments must hold 5 percent of their non-capital budgets in reserve to allow them to meet unforeseen spending needs, according to the text of a speech published on the Treasury’s website today. He’s aiming to prevent slippage in the country’s fiscal plans.

Gilt Yields

Gilt yields “might be in a bit of a 2 percent to 2.25 percent corridor for the time being,” said Afseth. “As far as austerity and doing the right thing, the U.K. is in the good books of investors and rating agencies, largely.”

The weighted average of 13 estimates in a Bloomberg survey calls for the yield to climb to 2.38 percent by the end of June.

The yield on 10-year gilts rose last week for the first time since the five days ended March 16 as investors bet the Bank of England will pause its stimulus plan after stronger- than-forecast inflation and retail sales data.

A report in two days will show Britain’s gross domestic product expanded 0.1 percent in the first quarter after a 0.3 percent contraction in the previous three months, according to the median estimate of economists in a Bloomberg survey.

Sterling has climbed 1.8 percent in the past month, the second-best performer after the yen among the 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro dropped 1 percent.

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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