Gilts Fall Third Day as German Court Ruling Damps Safety Demand

U.K. government bonds declined for a third day after a German court paved the way for the nation’s participation in Europe’s permanent bailout fund, damping demand for the safest assets.

Ten-year yields climbed to the most since May after Germany’s top constitutional court rejected bids to halt ratification of the 500 billion-euro ($645 billion) European Stability Mechanism, ending legal challenges that delayed efforts by euro-area leaders to contain the debt crisis. The pound rose to the highest level in four months versus the dollar after unemployment in the U.K. fell the most in more than two years, adding to signs the economy is emerging from recession.

Gilts have dropped because the “constitutional court ruling has cleared one more hurdle towards the euro rescue package, which means it’s risk-on today and safe-haven flows are reversing,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “The U.K. data is also helping sentiment.”

The yield on 10-year gilts climbed nine basis points, or 0.09 percentage point, to 1.83 percent at 4:22 p.m. London time, after reaching 1.85 percent, the highest since May 23. The 1.75 percent bond maturing in September 2022 fell 0.83, or 8.30 pounds per 1,000-pound ($1,609) face amount, to 99.28.

Germany’s Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the ESM and a deficit- control treaty championed by Chancellor Angela Merkel. The legal challenge had delayed efforts by Merkel and other euro-area policy makers to stem the region’s debt crisis.

Jobless Claims

Jobless-benefit claims declined by 15,000 to 1.57 million in August, the Office for National Statistics said today in London. The median forecast of 30 economists in a Bloomberg News Survey was for no change. Unemployment decreased 7,000 in the three months ended July.

Ten-year gilts also fell before the U.K. Debt Management Office sells 3.5 billion pounds of the benchmark securities tomorrow.

The difference in yield, or spread, between two- and 10- year gilts widened to 162 basis points, the most since May 3, signaling investors were adding to bets for faster inflation.

Volatility on U.K. bonds was the second highest in developed markets today behind Ireland, according to measures of 10-year or equivalent-maturity debt, the spread between two-year and 10-year securities and credit-default swaps.

Pound Advances

Gilts have returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies, outperforming German bunds, which gained 2.6 percent, and U.S. Treasuries, which earned 2 percent.

The pound strengthened 0.2 percent to $1.6105, after rising to $1.6131, the highest level since May 11. Sterling lost 0.2 percent to 80.11 pence per euro after depreciating to 80.28 pence, the weakest since July 5.

The pound advanced against the dollar yesterday after data showed the U.K.’s trade deficit shrank in July by more than economists predicted. The dollar weakened versus most major peers as policy makers on the Federal Open Market Committee begin a two-day meeting today amid speculation they will decide to buy bonds to boost the economy, a policy known as quantitative easing.

“U.K. data is playing into pound strength in the near term,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “A rebound in U.K. growth in the third quarter is largely anticipated. The dollar is weakening in advance of the FOMC decision tomorrow where more quantitative easing is anticipated.”

The pound has gained 0.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The dollar fell 2.2 percent and the euro rose 3.2 percent.

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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