Gilts Advance as Spanish Aid Delay Concern Boosts Safety Demand

U.K. government bonds rose for a second day amid speculation Spain will delay asking for the financial assistance it needs to fix its financial turmoil.

Ten-year gilt yields dropped from the highest since May after a U.K. report showed inflation slowed in August, enhancing the attraction of fixed-income securities. The pound strengthened versus the euro as a gauge of German investor sentiment stayed negative, spurring demand for Britain’s currency as a haven from the European debt crisis.

“In Europe and the U.K., the economies are still facing a lot of headwinds and maybe with yields around the 2 percent level for both gilts and bunds, investors would consider it not a bad investment,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley (MS) in London. Assistance “programs are in place but they’re only going to open when Spain asks. This sort of impasse has got to solve itself,” he said.

The 10-year gilt yield fell five basis points, or 0.05 percentage point, to 1.88 percent at 5 p.m. London time after rising to 1.99 percent yesterday, the highest level since May 10. The 1.75 percent bond due in September 2022 gained 0.43, or 4.30 pounds per 1,000-pound ($1,625) face amount, to 98.845.

Spain will consider seeking a bailout only if the conditions imposed are acceptable, Deputy Prime Minister Soraya Saenz de Santamaria said in an interview with Telecinco. In October, the government faces 29 billion euros ($37.89 billion) of debt redemptions as well as two regional elections that may shape the government’s thinking on a bailout request.

German Sentiment

Germany’s ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, climbed to minus 18.2 from minus 25.5 in August. The gauge of the current situation fell to 12.6, the lowest since June 2010.

U.K. consumer prices rose 2.5 percent in August from a year earlier, down from an annual gain of 2.6 percent in July, the Office for National Statistics said in London.

The U.K. 30-year break-even rate, a gauge of inflation expectations derived from the yield difference between regular and index-linked bonds, fell seven basis points to 2.94 percent.

The Statistics Authority said it will hold a consultation starting next month on possible changes to the calculation of inflation measures. The Consumer Prices Advisory Committee said there is “sufficient evidence to consider change” to inflation calculations. The National Statistician will publish a consultation document on Oct. 8.

Gilts have returned 1.7 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 2 percent and U.S. Treasuries earned 1.3 percent.

Pound Gains

The pound strengthened 0.5 percent to 80.33 pence per euro after depreciating to 81.15 pence on Sept. 14, the weakest level since June 115. Sterling was little changed at $1.6248.

The U.K. currency has appreciated 0.9 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro rose 3.4 percent and the dollar fell 2.9 percent.

The Bank of England will tomorrow release minutes of its Sept. 5-6 meeting, when policy makers left the benchmark interest rate on hold at 0.5 percent and keep the asset-purchase target at 375 billion pounds.

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

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