Gilts posted a weekly gain, with yields falling towards record lows, as speculation Standard & Poor’s would cut the credit ratings of some European nations boosted demand for AAA-rated U.K. assets.
Thirty-year yields also approached all-time lows after a European Union official said yesterday that S&P was poised to downgrade several euro-area countries after European markets closed. The rating company announced nine reductions after trading ended. The pound fell to a 17-month low against the dollar as concern Europe’s debt crisis is worsening increased investor appetite for the safety of the U.S. currency.
“The prospect of downgrades by S&P has been overhanging the market ever since their ratings were placed on review for downgrade,” Brian Barry, an analyst at Investec Bank Plc in London, said before S&P announced its decision. “Gilts are one of the main benefactors from these uncertain market conditions.”
The 10-year gilt yield dropped 5 basis points, or 0.05 percentage points, this week to 1.97 percent by the 5 p.m. close of trading in London yesterday. The 3.75 percent bond due September 2021 gained 0.5, or 5 pounds per 1,000-pound face amount, to 115.57. The yield dropped to an all-time low 1.93 percent on Dec. 30.
The 30-year yield dropped 4 basis points this week to 3.01 percent, after falling to a record 2.98 percent on Nov. 30.
France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, S&P said late yesterday. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also downgraded.
The pound fell 0.9 percent this week to $1.5290 after weakening to $1.5235, the lowest since July 22, 2010. Sterling strengthened 0.8 percent to 82.89 pence per euro.
Gilts also advanced as signs inflation is slowing boosted the appeal of the fixed payments from government debt.
U.K. producer prices dropped 0.2 percent in December from the previous month, the statistics office said yesterday. Economists forecast a 0.1 percent gain, according to a Bloomberg survey. Annual price growth slowed to 4.8 percent, the least in a year.
The data suggests “pipeline pressures are easing,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. That may be “a supportive factor for gilts,” he said.
The U.K. 10-year break-even rate, a gauge of inflation expectations derived from the difference in yield between regular and index-linked bonds, fell 9 basis points this week to 2.68 percentage points.
Gilts returned 17 percent last year, the best performers among 26 indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The U.K. securities rallied as a deepening of the euro-region’s sovereign-debt crisis stoked demand for the bonds as an alternative to euro-denominated assets.
The Bank of England has been buying about 5.1 billion pounds of gilts a week since October as part of its plan to boost the economy. The Monetary Policy Committee kept its benchmark interest rate at 0.5 percent and maintained its asset-purchase target at 275 billion pounds at a meeting yesterday, as forecast in Bloomberg News surveys of economists.
The U.K.’s Debt Management Office sold 3 billion pounds of 10-year bonds Jan. 11, with the auction attracting bids for more than twice the amount of debt allotted. The bonds were sold at an average yield of 2.085 percent, compared with 2.382 percent at the previous auction last month.
The pound has strengthened 1.5 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. Only the dollar, the yen and the Australian currency gained more.