The pound rose to the strongest in eight months against the euro and gilt yields dropped to a record amid concern Italy and Greece will struggle to form governments strong enough to implement austerity measures.
Sterling rose for the third time in the past four days against the Swiss franc. The Italian 10-year bond yield reached the highest since before the euro’s debut in 1999 after Prime Minister Silvio Berlusconi offered to resign and LCH Clearnet SA boosted the extra deposit it demands from clients to trade the nation’s securities. The pound advanced even as the British Retail Consortium said shop-price inflation eased to the slowest this year in October amid flagging consumer demand.
The pound’s gains are “consistent to some extent with a bit of a let-up in risk sentiment, as that tends to favor sterling on balance a little bit more than the euro,” said Henrik Gullberg, a London-based strategist at Deutsche Bank AG, the world’s largest foreign-exchange trader. “Euro-sterling is very much capped by what’s happening in Europe.”
The pound appreciated 0.9 percent to 85.21 pence per euro at 4:44 p.m. London time after reaching 85.09 pence, the strongest since March 3. Sterling fell 0.9 percent to $1.5948, and gained 0.5 percent to 1.4468 francs. It earlier climbed to 1.4486, within one centime of the highest level since May 11.
The pound is the “safe-haven of choice within Europe,” after the Swiss National Bank imposed a ceiling on the Swiss franc to curb its appreciation, according to Simon Smith, chief economist at FXPro in London.
Ten-year gilt yields slipped nine basis points, or 0.09 percentage point, to 2.18 percent, after sliding to 2.115 percent, the least since Bloomberg started collecting the data in 1989. Two-year yields were little changed at 0.52 percent.
U.K. 10-year bonds yielded 506 basis points less than their Italian counterparts today, the most since before the euro debuted in 1999. Italy’s five- and 10-year note yields surpassed 7 percent for the first time in the euro era.
U.K. gilts returned 14 percent this year, indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies show. German bunds rose 8.6 percent, while Italian securities lost 8.9 percent.
British government bonds benefited as investors sought a haven from a debt crisis in the euro area that has left Greece’s financial system on the verge of collapse, prompting Prime Minister George Papandreou to agree to resign and make way for a coalition government. Italian bonds dropped today even as the European Central Bank was said to be buying the securities.
Gilts have also been supported after the Bank of England expanded its bond-purchase target to 275 billion pounds ($439 billion) last month as it seeks to revive the economy.
The central bank will meet to decide its asset-purchase target and benchmark rate tomorrow. All 38 economists in a Bloomberg News survey forecast the BOE will keep the bond-buying target unchanged this month, while a separate poll calls for policy makers to hold the key rate at 0.5 percent.
Retail prices in Britain rose 2.1 percent from a year earlier, down from 2.7 percent in September, the BRC and Nielsen Co. said in London today.
The U.K. recovery will stall this quarter and 2012 growth will be about half the pace previously forecast as the euro-area crisis clouds the export and investment outlook, the Confederation of British Industry said. The economy will expand 0.9 percent this year and 1.2 percent in 2012, compared with previous forecasts for growth of 1.3 percent and 2.2 percent, the London-based business lobby said in a report today.