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U.K. Gilt Yields Drop Most in Four Months on Europe Debt Concern

Sept. 26 (Bloomberg) -- U.K. government bonds rose, with 10-year yields falling the most in almost four months, as speculation euro-area leaders are moving too slowly to end the debt crisis boosted demand for safer assets.

Benchmark gilt yields dropped to the lowest in two weeks after demonstrations turned violent yesterday in Madrid and the President of the Spain’s Catalonia region called early elections to push for self-determination. The pound gained for a third day against the euro as an index of U.K. retail sales rose in September. A gauge of the expected rate of inflation over the next 30 years, known as the break-even rate, dropped to the lowest level since 2003.

“The situation in Spain helps to underpin demand for gilts,” said Mohit Kumar, head of European fixed-income strategy at Deutsche Bank AG in London. “Gilts are expensive at these levels but an argument against going short at this point is the uncertainty about Spain.” A short position is a bet an asset will decline.

The 10-year gilt yield fell 13 basis points, or 0.13 percentage point, to 1.69 percent at 5 p.m. London time after dropping as much as 14 basis points, the most since May 30. The 1.75 percent bond due in September 2022 gained 1.145, or 11.45 pounds per 1,000-pound ($1,615) face amount, to 100.52.

Thousands of protesters gathered around the Spanish Parliament in Madrid late yesterday to oppose budget cuts and tax increases Rajoy has pursued since coming to power in December in breach of his campaign pledges.

Spain Concern

Mas’s bid for greater autonomy for Catalonia came a week after Rajoy rejected his demand for increased control of the region’s revenue. Mas yesterday set the vote for Nov. 25, saying the time has come to seek “self-determination.”

Gilts returned 0.4 percent this quarter through yesterday, according to Bank of America Merrill Lynch indexes. German bonds gained 0.5 percent and Treasuries rose 0.4 percent.

A gauge of annual U.K. retail sales growth climbed to 6 from minus 3 in August, the Confederation of British Industry said. A measure of expected sales for October was at 15, indicating stores see the pace of increase accelerating, according to the report.

The pound rose 0.1 percent to 79.64 pence per euro, and dropped 0.2 percent to $1.6148.

Sterling has strengthened 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro dropped 3.2 percent and the dollar weakened 2.4 percent.

‘Sufficient Evidence’

The 30-year break-even rate fell for a third day on speculation a recalculation of the retail-price index will impact inflation-linked securities.

The Consumer Prices Advisory Committee said in a statement on Sept. 18 that there is “sufficient evidence to consider change” to inflation calculations. The committee is examining “any unjustifiable formula effect gap” between the retail-price index and the consumer-price index.

The National Statistician will publish a document on Oct. 8 and the consultation will close on Nov. 30.

“The uncertainty about this issue has had a significant effect on the U.K. index-linked market,” said Kari Hallgrimsson, head of European inflation trading at JPMorgan in London. “We now have break evens in the long end below where they were after Lehman Brothers collapsed. They are at very distressed levels. That’s primarily because of this issue.”

The 30-year break-even rate, the difference in yield between nominal and index-linked bonds, dropped as much as six basis points to 2.75 percentage points, the lowest level since December 2003.

To contact the reporter on this story: Lucy Meakin in London at

To contact the editor responsible for this story: Paul Dobson at

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