U.K. Bonds Advance as Investors Seek Refuge From Spanish Turmoil

U.K. gilts advanced for a second day as concern Spain would hold back from seeking a bailout boosted demand for the perceived safety of Britain’s government bonds.

The 10-year yield fell to the lowest in more than three weeks. Spanish Prime Minister Mariano Rajoy yesterday said there were no immediate plans to ask for a bailout, after Reuters reported on Oct. 1 that Spain may seek aid as soon as this weekend. The pound slid for a fourth day against the euro as an index of U.K. services rose at a slower pace than economists forecast in September.

“Expectations about the next developments in Spain are the driving force,” for gilts, said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “News stories that a bailout request could come as soon as this weekend being quashed have contributed to a stronger tone.”

The yield on 10-year gilts dropped two basis points, or 0.02 percentage point, to 1.69 percent at 4:30 p.m. London time, after falling to 1.68 percent, the lowest since Sept. 10. The 1.75 percent security due in September 2022 rose 0.20, or 2 pounds per 1,000-pound ($1,608) face amount, to 100.575. Two-year rates were one basis point lower at 0.18 percent.

Rajoy is weighing the terms of a Sept. 6 proposal by European Central Bank President Mario Draghi to buy bonds of cash-strapped nations including Spain if they make a formal aid request from the euro region’s government-run rescue funds.

Financial Upheaval

The U.K. has been spared greater financial upheaval by staying outside the euro area, a study by International Monetary Fund economists said.

Under normal times, joining the euro would lower trade costs and help boost a country’s welfare in the long run, according to the IMF study released yesterday in Washington. In a financial crisis that sent interest rates to levels recently seen in the euro region, the effect would be negative, it said.

A gauge based on a survey of U.K. purchasing managers fell to 52.2 last month from 53.7 in August, Markit Economics and the Chartered Institute of Purchasing and Supply said today. The median estimate of 29 economists in a Bloomberg News survey was for a reading of 53. A reading above 50 indicates growth.

Bank of England Markets Director Paul Fisher said last week that third-quarter economic growth will be “very strong.” That’s in part due to a rebound from the second quarter, when an extra public holiday helped keep the economy mired in a recession that started in the final three months of 2011.

U.K. shop-price inflation slowed in September, the British Retail Consortium said today. Retail prices rose 1 percent from a year earlier, compared with a 1.1 percent gain in August, the trade group and Nielsen Co. said in a report.

Pound Weakens

Gilts returned 3.3 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 3.2 percent and U.S. Treasuries earned 2.4 percent.

The pound dropped 0.2 percent to 80.28 pence per euro, after reaching 80.31 pence, the weakest level since Sept. 20. Sterling declined 0.4 percent to $1.6078, after touching $1.6069, the lowest since Sept. 12.

The pound has strengthened 0.5 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro gained 0.4 percent and the dollar weakened 2.2 percent.

The Bank of England will leave its asset-purchase target at 375 billion pounds at its monthly policy meeting tomorrow, according to all 40 economists surveyed by Bloomberg News. It will also leave its main interest rate at a record-low 0.5 percent, according to all 50 estimates in a separate survey.

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