U.K. Gilts Advance Amid Fiscal-Cliff Concern; Pound Weakens

U.K. 10-year gilts rose this week, with yields falling the most in a month, as speculation U.S. lawmakers will fail to reach agreement in time to avoid the so- called fiscal cliff boosted demand for safer assets.

Ten-year bonds snapped two weeks of declines as doubt grew whether U.S. leaders will find a way to avoid more than $600 billion in spending cuts and tax increases that will start in January. The pound depreciated to the lowest level against the euro in more than eight months.

“Gilts and other core-market bonds are being boosted by uncertainty in the U.S.,” said Dagmar Dvorak, a director of fixed-income and currencies in London at Baring Asset Management, which oversees $50 billion. “The gain was probably exacerbated by choppy and illiquid market conditions at the end of the year.”

The benchmark 10-year yield dropped six basis points, or 0.06 percentage point, to 1.82 percent as of 5 p.m. in London yesterday, the biggest weekly decline since the period ended Nov. 30. The 1.75 percent bond due in September 2022 gained 0.55 from last week, or 5.50 pounds per 1,000-pound ($1,616) face amount, to 99.36.

U.S. congressional leaders met with President Barack Obama yesterday and House Republicans are due to convene tomorrow as lawmakers seek to avoid the spending cuts and tax gains.

Bond Returns

Gilts returned 3 percent this year through Dec. 27, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4.4 percent and Treasuries earned 2.2 percent.

The pound slipped 0.4 percent this week to 81.83 pence per euro. It dropped to 82.25 pence yesterday, the weakest level since April 18. It was little changed at $1.6161.

If sterling closes stronger than 83.34 pence per euro on Dec. 31, this will be the fourth year of gains, the longest winning streak since the introduction of the single currency in 1999.

The pound has risen 1.5 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 0.6 percent and the dollar fell 2.8 percent.

Economists predict reports next week will show improvement in U.K. house prices and mortgage lending.

Mortgage approvals rose to 54,000 last month from 52,982 in October, according to a median forecast of 17 analysts in a Bloomberg News survey, before the data is released on Jan. 3.

The Nationwide Building Society will say U.K. home prices fell 0.9 percent in December from a year ago, less than November’s 1.2 percent drop, according to a separate Bloomberg survey. The data is also due on Jan. 3.

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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