Pound Approaches Strongest Since 2008 Versus Euro on Safety Bid

The pound rose toward the strongest level since 2008 against the euro as concern that Europe’s debt crisis is worsening boosted demand for the relative safety of the U.K. currency.

Gilts outperformed German bunds after Moody’s Investors Service lowered its rating outlooks for Germany, the Netherlands and Luxembourg, citing concern the three nations will have to support weaker euro-region members. Economists surveyed by Bloomberg News predict a U.K. government report tomorrow will show the nation remains in a recession.

“There is a broad outflow of capital from Europe seeking a safer home,” said Paul Robson, senior foreign-exchange strategist at Royal Bank of Scotland Plc in London. “This is a continuation of the trend in euro-sterling.”

The pound advanced 0.6 percent to 77.71 pence per euro at 4:53 p.m. London time after appreciating to 77.55 pence yesterday, the strongest since October 2008. The U.K. currency rose 01. percent to $1.5524.

Spanish bonds tumbled today as the nation’s borrowing costs increased at an auction amid concern debt at its banks and regions will force it to seek a sovereign bailout.

Moody’s said in a statement late yesterday that it lowered the Aaa credit ratings of Germany, the Netherlands and Luxembourg due to the “increasing likelihood” of collective support for European countries such as Spain and Italy.

Sterling has risen 4.4 percent in the past year, the third- best performer after the yen and the dollar among the 10 developed-nation currencies tracked by Bloomberg Correlation- Weighted Indexes.

Spread Narrows

The extra yield that investors demand to hold 10-year U.K. securities instead of German ones shrank seven basis points to 23 basis points. That’s the narrowest since July 3, based on closing prices.

The benchmark 10-year gilt yield was little changed at 1.47 percent after falling to a record 1.407 percent yesterday. The 4 percent bond due in March 2022 traded at a price of 122.635.

“Gilts could continue to outperform over the next few weeks,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley & Co in London. “Invariably they do well when there is over a three-week gap in the issuance calendar, which is what we have now.”

U.K. government debt has returned 4.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4.5 percent.

Debt Sale

The U.K. sold 4 billion pounds of inflation-protected bonds maturing in March 2044 today, with 90 percent allocated to British investors, the Debt Management Office said.

The sale through banks brought issuance for the fiscal year that started in April to 66.8 billion pounds, compared with the whole-year target of 164.4 billion pounds, the debt agency said.

The difference in yield between 10-year gilts and similar- maturity index-linked securities, a measure of inflation expectations known as the break-even rate, widened one basis point to 2.36 percentage points.

The euro will find so-called support against the pound at around 77.44 pence, the 50 percent retracement of the single- currency’s rally from 2000 to 2008, Karen Jones, head of fixed- income, commodity and currency technical analysis at Commerzbank AG in London, wrote today in a note to clients.

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

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

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