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Gilts Jump on Europe Slowdown Signs; Pound Slides Versus Dollar

U.K. government bonds rose, with 10-year yields dropping the most in a week, as a decline in German exports and Italian industrial production underpinned demand for safer securities.

Gilts gained for the first time in four days and the pound weakened against the dollar after U.K. producer prices unexpectedly dropped in May, adding to speculation the Bank of England will resume asset purchases to cap borrowing costs. Policy makers left their benchmark interest rate and so-called quantitative-easing program on hold at a meeting yesterday.

“Gilts are attracting demand as a safe haven because hopes of the euro-region being repaired are still just hopes and life for all the peripheral economies is getting harder,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “Although we didn’t get any QE yesterday, we think there’s every chance that we get that announcement in the next month or two and that drives gilt outperformance.”

The yield on the 10-year gilt fell eight basis points, or 0.08 percentage point, to 1.64 percent at 4:14 p.m. in London after dropping 13 basis points, the biggest decline since June 1. The 4 percent bond maturing in March 2022 rose 0.74, or 7.40 pounds per 1,000-pound ($1,544) face amount, to 121.155. The yield dropped to a record 1.439 percent on June 1.

German exports slid 1.7 percent in April from a month earlier, when they gained 0.8 percent, the Federal Statistics Office said in Wiesbaden. Italian output fell 1.9 percent from March, when it rose a revised 0.6 percent, the national statistics office said in Rome. A separate report showed French confidence declined

Weekend Talks

Spanish Prime Minister Mariano Rajoy said yesterday he’s discussing with European leaders how to shore up the country’s banks as euro finance chiefs plan to hold weekend talks on a possible aid package. A request for help may come as soon as tomorrow when finance ministers hold a conference call, said a German official and a European Union aide, each of whom declined to be identified because the matter is confidential.

“Because of problems in the euro-region, the safe-haven demand for gilts will continue to be intense,” Bank of America’s Wraith said. “Gilt yields can make new lows.”

The pound fell for the first time in three days versus the dollar after the Office for National Statistics said U.K. producer prices dropped 0.2 percent from April, the first decline since December. The median forecast of economists in a Bloomberg survey was for a 0.1 percent increase.

Sterling weakened 0.7 percent to $1.5422, and slid 0.8 percent to 122.67 yen. The U.K. currency was little changed at 80.87 pence per euro after gaining 0.4 percent yesterday.

QE Program

The U.K. Monetary Policy Committee yesterday held its bond-purchase program at 325 billion pounds and its benchmark rate at a record-low 0.5 percent. The decision to refrain from increasing stimulus was predicted by 37 of 42 economists surveyed by Bloomberg. Minutes of the meeting will be published on June 20.

“The producer prices were lower than forecast,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “The Bank of England is mindful of inflation. It could do more to stimulate the economy. Sterling has come off against the dollar.”

The pound has declined 1.6 percent in the past month, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, as data pointing to slower growth raised the prospect of additional stimulus.

‘Inflation Credibility’

“Maintaining its inflation credibility may be less of an obstacle to the MPC sanctioning more QE in the months ahead,” Philip Shaw, an economist at Investec Securities in London, said before the inflation data was released. “It would be wrong to rule out more QE.”

While the outlook for the U.K. economy has weakened, the pound has advanced 3.7 percent against the euro in the past three months and reached 79.51 pence on May 16, the strongest level since November 2008.

European Central Bank President Mario Draghi said May 6 that officials stand ready to act as the growth outlook worsens in the euro area, Britain’s biggest trading partner. While the ECB left its benchmark rate at 1 percent that day, Draghi said “a few” governing council members sought a cut.

Gilts have returned 2.2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 3.5 percent, with U.S. Treasuries rose 1.7 percent, the indexes showed.

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