Gilts Advance as Waning Greek Optimism Boosts Safety Bid

U.K. 10-year gilts rose for a third day as Spanish borrowing costs surged to more than 7 percent after Greece’s weekend election failed to reassure investors that the debt crisis will be contained.

Two-year note yields slipped to a record following the release of a report that showed bad loans at Spanish lenders jumped in March, boosting demand for the relative safety of U.K. debt. The pro-bailout New Democracy and Pasok parties won enough seats to control Greece’s 300-member legislature should they form a coalition government. Anti-bailout party Syriza came in second behind New Democracy. Sterling weakened against the dollar.

“The relief rally after the Greek election was short-lived,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Demand for gilts and other core bonds is underpinned by the fact that there are still a lot of hurdles in Europe. People look at Spanish bond yields and they start to wonder whether the country will need a sovereign bailout.”

Ten-year yields fell one basis point, or 0.01 percentage point, to 1.66 percent at 4:28 p.m. London time. The 4 percent security due March 2022 rose 0.04, 40 pence per 1,000-pound ($1,565) fact amount, to 120.90. Two-year yields rose three basis points to 0.25 percent after dropping to 0.17 percent.

While gilts handed investors a 1 percent loss this month, they outperformed German securities, which fell 1.5 percent, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Sterling Falls

Spain’s 10-year yield climbed 29 basis points to 7.16 percent, after rising to 7.29 percent, the most since the euro was introduced in 1999. The nation requested as much as 100 billion euros ($126 billion) of aid to support its banks on June 9.

The pound strengthened 0.2 percent to 80.27 pence per euro. It gained 0.6 percent last week as investors shifted out of the euro before the Greek election. The U.K. currency lost 0.4 percent to $1.5652.

Sterling has appreciated 1.9 percent this year, the second-best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, after the New Zealand dollar, as investors sought U.K. assets as a haven from Europe’s debt crisis. The euro dropped 2.3 percent.

Futures traders increased their bets that the British pound will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on June 15.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the pound compared with those on a gain was 23,112 on June 12, compared with net shorts of 2,867 a week earlier.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE