Gilt Yields Drop Most in 12 Weeks on Stalled Growth, Euro Crisis

U.K. government bonds rose, with 10- year yields dropping the most in 12 weeks, as signs economic growth has stalled in Britain and the euro area spurred demand for safer investments.

Benchmark bonds gained for a third day yesterday as a government report confirmed the U.K. economy shrank last quarter, boosting speculation the Bank of England will keep its benchmark rate at a record low. Gilts also gained as purchasing managers’ indexes showed European services and manufacturing output contracted for a seventh month and Greek Prime Minister Antonis Samaras said his nation needed more time to meet its economic targets. The pound strengthened against the dollar.

“The euro-zone and sovereign-debt issues will continue,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. “Weak PMI data from the peripheral European countries exacerbates their problems. It pushes investors into the safe havens, causing gilt yields to tighten. Official rates in the U.K. are likely to be low for a long time.”

The 10-year gilt yield dropped 14 basis points, or 0.14 percentage point, this week to 1.53 percent at 5 p.m. London time yesterday, the biggest decline since the period ended June 1. The 4 percent bond due in March 2022 gained 1.365, or 13.65 pounds per 1,000-pound ($1,582) face amount, to 121.835.

U.K. gross domestic product shrank 0.5 percent in the second quarter, after contracting 0.3 percent in the previous three months, the Office for National Statistics said.

Other Measures

Bank of England policy makers next meet on Sept. 6. Minutes of their most recent meeting released Aug. 15 showed they voted unanimously to keep their bond-purchase target unchanged and said they will assess the need for other measures in light of the impact of a credit-boosting program.

A gauge of euro-area services and manufacturing was 46.6 this month, Markit Economics said Aug. 23, below the level of 50 that signals contraction. German economic growth slowed to 0.3 percent last quarter, from 0.5 percent in the previous three months, the Federal Statistics Office said the same day.

Gilts have returned 3.3 percent this year through Aug. 23, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 3.7 percent.

Samaras used interviews this week with German and French newspapers to call for more time for his nation to meet its program targets as European officials look for ways to stave off an immediate crisis.

The pound strengthened 0.8 percent this week to $1.5820, and declined 0.8 percent to 79.24 pence per euro.

The U.K. plans to auction a combined 3 billion pounds to 28-, 91- and 182-day bills on Aug. 31.

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Eleanor Lawrie in London at elawrie@bloomberg.net

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

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