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Gilts Rise as ECB Measures Disappoint; Pound Gains Versus Euro

U.K. government bonds rose after European Central Bank president Mario Draghi failed to announce measures that investors and analysts consider sufficient to stem the debt crisis, stoking demand for perceived haven assets.

Two-year note yields fell to a record after the ECB said it may undertake open-market operations to stem rising Spanish and Italian borrowing costs. The Bank of England left its asset- buying program, known as quantitative easing, at 375 billion pounds ($581.6 billion) and kept interest rates on hold. The pound rose against the euro.

“The market was pricing in something significant from Draghi and he failed to deliver, hence we are back to the good old trades of going long the core rates markets, including gilts,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley (MS) in London.

Two-year yields fell three basis points, or 0.03 percentage point, to 0.06 percent at 4:24 p.m. London time after sliding six basis points to 0.033 percent, the lowest since Bloomberg began tracking the data in 1992.

Ten-year yields fell seven basis points to 1.45 percent, after dropping to a record 1.407 percent on July 23.

European Central Bank President Mario Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan. Draghi pledged last week to do “whatever it takes” to save the euro, fueling expectations for imminent large scale bond-buying.

BOE Decisions

U.K. gilts returned 3.9 percent this year, after surging 17 percent in 2011 as investors sought a haven from the euro- region’s debt crisis, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies showed. German bunds gained 3.6 percent in 2012, with U.S. Treasuries earning 2.6 percent.

The pound rose 0.5 percent to 78.29 pence per euro after earlier losing 0.5 percent to the least in three weeks at 79.12 pence. It slid 0.2 percent to $1.5503 after rising as much as 0.9 percent to $1.5679.

Sterling has depreciated 1.3 percent in the past three months, the fourth-worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes amid the deteriorating economy. The dollar gained 3.6 percent, while the euro slid 5.3 percent.

Key Rate

U.K. policy makers maintained their key rate at a record- low 0.5 percent, as predicted by all 53 economists surveyed by Bloomberg News. The central bank increased its bond purchases by 50 billion pounds last month to boost a U.K. economy in its first double-dip recession since the 1970s amid a deepening euro-region debt crisis.

“The Bank of England put in place their quantitative easing measures very recently and it would undermine their credibility to come up with more measures based on weak data just before the meeting,” said Neil Mellor, a foreign-exchange strategist at Bank of New York In London.

The median forecast of 40 economists surveyed by Bloomberg was for asset purchases to be maintained. One analyst predicted an increase to 400 billion pounds.

The Bank of England has expanded its toolkit with a Funding for Lending Scheme to unclog bank credit and help pull the country out of recession. The worsening outlook prompted banks including Morgan Stanley and Barclays Plc (BARC) to revise forecasts this week and predict more U.K. stimulus later this year.

The U.K. economy shrank the most since 2009 in the second quarter, the Office for National Statistics said on July 25. Manufacturing contracted the most in more than three years in July, Markit Economics reported yesterday.

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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