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Gilts Advance as Osborne Says Deficit to Fall Amid Spending Cuts

Chancellor of the Exchequer George Osborne
Chancellor of the Exchequer George Osborne holds the dispatch box containing the 2012 budget as he exits 11 Downing Street in London. Photographer: Chris Ratcliffe/Bloomberg

Ten-year gilts rose for a third day as Chancellor of the Exchequer George Osborne said the deficit will drop next fiscal year amid government spending cuts and the Debt Management Office trimmed its bond-sales target.

Longer-dated bonds outperformed two-year notes even as Osborne said the Debt Management Office will explore issuing debt with maturities of more than 50 years. The office said it plans to sell 167.7 billion pounds ($266 billion) of gilts in the year ending in March 2013, down from an estimated 179.4 billion pounds this year. Gilts declined earlier after a report showed the deficit almost doubled last month.

The budget “reassured investors and that’s given some support to gilts,” said Nick Stamenkovic, a strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks. “He’s committed to his medium-term fiscal-consolidation program, and there will be no significant changes. That will support gilts from the perspective of fiscal policy.”

The 10-year yield fell five basis points, or 0.05 percentage point, to 2.37 percent at the 5 p.m. close of trading in London after dropping to 2.36 percent, the lowest since March 15. The 4 percent security due March 2022 gained 0.48, or 4.80 pounds per 1,000-pound face amount, to 114.365.

Two-year yields were little changed at 0.47 percent, while the 30-year gilt yield slid five basis points to 3.41 percent.

The extra yield investors get for holding 30-year bonds instead of two-year notes shrank five basis points to 294 basis points. The spread has narrowed from a 2012 high of 300 basis points on March 16.

Avoid Recession

The pound weakened 0.1 percent to $1.5851 after rising as much as 0.4 percent to $1.5923. The currency was little changed at 83.30 pence per euro.

Sterling has dropped 1.6 percent in the past year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The pound is little changed in 2012, the indexes show.

The U.K. will avoid a recession and the unemployment rate will peak at 8.7 percent, Osborne said.

Osborne and Prime Minister David Cameron are seeking to retain the U.K.’s top AAA credit rating by reducing a deficit that’s now more than 8 percent of gross domestic product. The shortfall will drop to 7.6 percent of GDP in the next fiscal year, the Office for Budget Responsibility said.

‘Support’ for Gilts

“The combination of fiscal orthodoxy and monetary policy neutrality should lend gilts support going forward,” Moyeen Islam and Henry Skeoch, strategists at Barclays Capital in London, wrote in a client note. “The government has remained firmly committed to a path of fiscal austerity. This should provide some comfort to the rating agencies and also international investors.”

Net borrowing excluding support for banks was 15.2 billion pounds last month, the highest for any February on record, compared with 8.9 billion pounds a year earlier, the Office for National Statistics said in London.

Gilts have lost 3.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The securities earned 17 percent last year, the most among 26 indexes tracked by Effas, as investors sought refuge from the euro-region’s debt crisis.

The government is considering issuing so-called perpetual bonds in order to lock in lower borrowing costs, Osborne said. The 10-year yield, which fell to a record low 1.92 percent on Jan. 18, is more than 3 percentage points below its average since March 1992, according to data compiled by Bloomberg.

“The Debt Management Office will consult on the case for issuing gilts with maturities longer than 50 years, and the case for a perpetual gilt with no fixed redemption date,” Osborne said in his speech. That is “something Britain last felt able to issue six decades ago,” he said.

The yield on the 4 percent gilt maturing in January 2060 declined five basis points to 3.4 percent.

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