U.K. Gilt Yields Fall to Record on Euro Concern; Pound Weakens

U.K. government bonds rose, with two-, five- and 10-year yields falling to records, as concern the euro-area crisis is deepening pushed investors toward perceived safer assets.

Ten-year yields dropped the most in a month as Spain’s bond slumped after the El Pais newspaper reported that six of the country’s regions may ask the central government for financial assistance. The difference in yield between inflation-linked U.K. securities and conventional bonds narrowed before the Debt Management Office sells index-linked gilts through banks this week. The pound weakened versus the euro and the dollar.

“There’s a flight-to-safety bid today coming from declines in Spanish and Italian bonds, and gilts are benefiting,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. Longer-maturity index-linked bonds are “underperforming a little as there is some space building to accommodate the upcoming U.K. syndicated sale.”

The yield on the 10-year gilt declined two basis points, or 0.02 percentage point, to 1.47 percent at 4:21 p.m. in London after falling to a record 1.407 percent. The yield slid as much as eight basis points, the most since June 21. The 4 percent bond due in March 2022 gained 0.155, or 1.55 pounds per 1,000- pound ($1,551) face amount, to 122.635.

The two-year yield dropped as low as 0.054 percent, and the five-year yield reached 0.416 percent, also records.

Gilts have returned 4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, as investors sought the securities as a refuge from Europe’s debt crisis. German bunds gained 4.6 percent, and U.S. Treasuries advanced 2.9 percent.

Spain Concern

Spain’s 10-year bond yields climbed as much as 30 basis points to a euro-era record 7.57 percent, and similar-maturity Italian rates reached 6.43 percent, the highest since January.

Catalonia, Castilla-La-Mancha, Murcia, the Canary Islands, the Balearic Islands are among six Spanish regions that have admitted they may ask for aid from the central government after Valencia sought a bailout on Friday, El Pais reported.

The difference between yields on 10-year U.K. index-linked securities and similar-maturity gilts, a measure of inflation expectations known as the break-even rate, shrank four basis points to 2.34 percentage points.

Pound Declines

The pound dropped for the first time in four days against the euro after earlier climbing to the strongest level since October 2008.

“We have probably reached a short-term base around this area for the euro versus sterling,” said Adrian Schmidt, a foreign-exchange strategist at Lloyds TSB Bank Plc in London, in a an interview with Guy Johnson and Francine Lacqua on Bloomberg Television’s “City Central”. “I don’t see any particular reason from an economic perspective to be long of sterling.”

The U.K. currency declined 0.3 percent to 78.07 pence per euro after earlier rising to 77.55 pence. Sterling weakened 0.7 percent to $1.5512.

The Office for National Statistics will confirm the U.K. economy remains stuck in recession when it releases its first estimate of gross domestic product for the second quarter on July 25, according to a Bloomberg News survey.

The pound has gained 4.3 percent in the past year, the third-best performer after the dollar and yen among the 10 developed-market currencies tracked by Bloomberg Correlation- Weighted Indexes. The euro weakened 8 percent.

To contact the reporter on this story: Neal Armstrong at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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