Gilts Fall 2nd Day on Europe Outlook; Pound Weakens Versus Euro

U.K. government bonds fell for a second day as speculation European leaders will step up measures to contain the euro-area’s sovereign-debt crisis reduced demand for safer assets.

Gilts dropped along with German bunds after French President Francois Hollande and German Chancellor Angela Merkel said their countries would do everything needed to keep the euro area intact. European Central Bank President Mario Draghi signaled yesterday that policy makers may resume their bond- buying program to bring down Spanish and Italian yields. The pound weakened against the euro.

“There’s a big risk-on move and the reciprocal of that is higher yields, both in Germany and the U.K.,” said Alan Clarke, an economist at Scotiabank Europe Plc in London.

The 10-year gilt yield rose six basis points, or 0.06 percentage point, to 1.54 percent at 5 p.m. London time after dropping to a record 1.407 percent on July 23. The 4 percent bond maturing in March 2022 declined 0.57, or 5.70 pounds per 1,000-pound ($1,572) face amount, to 121.92. The yield climbed five basis points this week.

Germany and France are “bound by the deepest duty” to keep the 17-nation currency bloc intact, Merkel and Hollande said in a joint statement after they spoke by telephone today. The two sought “quick” implementation of resolutions made at a June 28- 29 European Union summit, they said.

U.S. Growth

Gilts also dropped after a U.S. report showed the world’s largest economy grew more in the second quarter than analysts forecast. Gross domestic product expanded at a 1.5 percent annual rate, after a revised 2 percent gain in the prior quarter, the Commerce Department said. The median forecast of economists surveyed by Bloomberg was for a 1.4 percent gain.

U.K. government bonds have returned 17 percent in the past year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 12 percent, and Treasuries rose 9.4 percent.

The pound fell 0.4 percent to 78.65 pence per euro after dropping to 78.74, the weakest level since July 17. Sterling rose 0.2 percent to $1.5724. It earlier climbed to $1.5768, the highest since June 20.

Sterling has appreciated 4.5 percent in the past year, the third-best performer behind the yen and the dollar of the 10 developed-market currencies tracked by Bloomberg Correlation- Weighted Indexes. The euro has weakened 6.9 percent.

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

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

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