Pound Gains Versus Euro on Debt Woes, U.S. Impasse; Gilts Rise

The pound gained versus the euro and gilts rose amid concern that the U.S. and euro-region nations will struggle to contain their debt burdens, increasing the relative appeal of British assets.

Gains by British bonds left the yield on the 10-year gilt within two basis points of that on similar-maturity U.S. Treasuries. A U.K. retail-sales index fell and Bank of England policy maker David Miles said attempts to slow inflation too quickly risk stalling the recovery, prompting investors to pare bets on higher interest rates. Investors speculated that the sovereign-debt crisis will derail the economy and concern mounted U.S. lawmakers will fail to agree to raise the federal debt ceiling by next week’s deadline.

“The focus is on the U.S. debt situation and also what’s going on in Europe, in Italy, Greece and Ireland,” said Chris Huddleston, a trader at Investec Bank Plc in London.

The pound was 0.5 percent stronger against the euro at 87.57 pence at 4:19 p.m. in London. It was little changed at $1.6336 after reaching $1.6439 yesterday, the most since June 14. Britain’s currency declined 0.2 percent to 127.08 yen.

U.K. 10-year yields fell two basis points to 2.97 percent. Two-year yields dropped one basis point to 0.67 percent.

The Confederation of British Industry’s retail-sales gauge fell to minus 5, the lowest since June 2010, from minus 2 in June, the London-based business lobby said in a report today. Britons curtailed spending on groceries and home improvement, the survey showed.

Energy Inflation

Inflation “is likely to move higher in the near term, largely as a result of higher prices for domestic energy, before coming down again,” Miles said in a speech late yesterday at the London School of Economics.

Investors have pushed back expectations for the next rate increase to beyond June 2012, according to forward contracts on the sterling overnight interbank average. At the start of last month, they were betting on a February 2012 increase.

Bank of England officials said this month that the weakness in the economy may persist “longer than previously thought” as they kept the key interest rate at 0.5 percent.

“The Monetary Policy Committee is moving toward a more dovish stance,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “I can’t see a rate hike in the next year. I think they will remain on hold until at least the second half of next year, and that will undermine the pound further.”

Gilts Versus Treasuries

The 10-year gilt yielded 1.7 basis points more than similar Treasuries, down from a 2011 high of 35 basis points on June 8. The spread was less than one basis point yesterday, the least since April 2010. The British securities yielded 33 basis points more than German bunds, from as much as 64 basis points in January.

Gilts have returned 4.6 percent since the end of 2010, compared with 3.4 percent for Treasuries and 2.3 percent for German bunds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian securities lost 2.9 percent, the indexes showed.

The British economy barely grew in the second quarter, data this week showed, suggesting the central bank will keep rates at a record low to aid the recovery.

Sterling has fallen 8.5 percent in the last 12 months, making it the second-worst performer among 10 developed-market currencies after the U.S. dollar, according to Bloomberg Correlation-Weighted Currency Indexes.

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