U.K. Gilts Gain for Second Week on Spain Concern; Pound Slides

U.K. government bonds rose, posting a second weekly gain, as speculation the Spanish government’s fifth austerity package will fail to resolve the nation’s debt crisis boosted demand for safer assets.

Ten-year yields fell to the lowest level in more than two weeks before Spain reveals the results of stress tests on its banks. The pound weakened against all of its 16 major counterparts tracked by Bloomberg. Sterling fell for the first time this week against the euro on speculation its four-day advance was excessive.

“Nervousness about the situation in Spain remains pretty close to the surface, even after the budget” released yesterday, said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. That “typically knocks onto lower yields for gilts because of safe-haven flows.”

The 10-year gilt yield dropped two basis points, or 0.02 percentage point, to 1.72 percent at 4:19 p.m. London time after falling to 1.68 percent, the lowest since Sept. 10. The 1.75 percent bond due in September 2022 rose 0.14, or 1.40 pounds per 1,000-pound ($1,620) face amount, to 100.31. The yield has fallen 12 basis points this week.

Gilts returned 1 percent this quarter through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 1.1 percent and U.S. Treasuries rose 0.5 percent.

Spain Budget

Spanish Prime Minister Mariano Rajoy’s government yesterday announced a 13 billion-euro ($16.8 billion) package of spending cuts, and a new tax on lottery winnings in an effort to shrink the euro area’s third-largest budget deficit.

The Bank of Spain said this week early indicators suggest gross domestic product is still falling at a “significant pace” after the recession deepened in the second quarter.

The release of the results of the independent stress test conducted by consulting firm Oliver Wyman will reveal the size of the hole in the Spanish banking system, which is reeling from a property crash, prompting the country to agree a 100 billion- euro bailout in July.

Sterling has gained 2.7 percent versus the dollar this quarter, its biggest advance since the three months ended March.

The pound dropped 0.2 percent to 79.68 pence per euro after appreciating to 79.24 pence yesterday, the strongest level since Sept. 6. The currency fell 0.7 percent to $1.6113, the weakest since Sept. 13.

U.K. Data

The pound weakened today even as GfK said its index of U.K. consumer confidence rose one point in September to minus 28, a 15-month high. The gauge had held at minus 29 for the previous four months.

A separate report showed Britain’s services industry expanded at its fastest pace for more than a year in July, adding to evidence that the economy returned to growth in the third quarter.

Services, which account for about three quarters of the economy, grew 1.1 percent from June, when the sector fell 1.5 percent, the Office for National Statistics said in London today. It was the biggest increase since May 2011.

The pound is little changed in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 0.7 percent and the dollar slumped 4.1 percent.

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

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