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Gilt Yields Fall to Record Lows on Europe Concerns; Pound Rises

U.K. gilt yields dropped to record lows as investors sought the securities as a haven from turmoil in euro-region debt markets and slowing economic growth.

Yields on two- and 10-year debt declined to the least since Bloomberg started tracking the securities in 1989 after an industry report showed U.K. house prices fell for the first time in four months. The Debt Management Office sold 2.5 billion pounds ($3.88 billion) of 27-, 90- and 181-day bills today after Italy raised less than its maximum target at an auction yesterday. Gilts were the best-performers this year among 26 government markets tracked by Bloomberg. The pound rose.

“The theme of the U.K.’s safe-haven status is always relevant when you’ve got concerns about Europe,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “When we look at yesterday’s Italian auction, when you extrapolate that into 2012, it still points to a very uncertain outlook. The level of primary issuance in Italy next year is something for the markets to be concerned about and a natural consequence of that is for gilts to remain firm.”

The 10-year yield was little changed at 1.98 percent at 3:20 p.m. London time after falling to a record 1.932 percent. The 3.75 percent bond due September 2021 traded at 115.535. The two-year yield rose three basis points, or 0.03 percentage point, to 0.33 percent after declining to 0.271 percent. Trading of gilts shut early today due to the end-of-year holidays.

Annual Return

Italy sold 7.02 billion euros ($9.11 billion) of debt yesterday, less than its maximum target of 8.5 billion euros. The Rome-based Treasury agreed to pay a yield of 6.98 percent on securities maturing in 2022, close to the 7 percent level that prompted other euro-area nations to seek bailouts.

Gilts have returned 17 percent on average in 2011, including reinvested interest, the most among 26 government markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. They beat German debt, considered the euro area’s safest securities, by more than 7 percentage points, the most since 1998. Treasuries made 9.8 percent.

Ten-year gilts completed a fourth weekly gain as Nationwide Building Society said the average cost of a U.K. home fell 0.2 percent in December from the previous month. From a year earlier, values rose 1 percent.

The pound strengthened 0.6 percent to 83.54 pence per euro, extending this year’s advance to 2.6 percent. Sterling rose 0.8 percent to $1.5532.

Sterling has appreciated 3 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen was the best performer, rising 11 percent, and the dollar gained 7.3 percent.

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