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U.K. Gilt Yields Fall Most in Four Weeks on Fiscal-Cliff Concern

Pound Gains Third Day Versus Dollar as Mortgage Approvals Rise
Sterling climbed to the strongest against the yen since April last year amid speculation the Bank of Japan will step up stimulus measures to support growth. Photographer: Chris Ratcliffe/Bloomberg

U.K. gilts rose, with 10-year yields falling the most in four weeks, as speculation U.S. lawmakers will fail to agree on a way to avoid the so-called fiscal cliff spurred demand for safer assets.

Benchmark yields fell to a two-week low after U.S. Senate Majority Leader Harry Reid said it looks like the nation is headed “over the cliff,” referring to the more than $600 billion in tax increases and spending cuts that will take effect in January unless Congress acts. Gilts also gained on speculation some investors were looking to reduce risk as the year-end approaches. The pound was little changed against the dollar and euro.

“There is an element of buying related to year-end cash management and that’s happening in a very thin market,” said Stuart Thomson, a money manager at Ignis Asset Management in Glasgow. “The U.S. fiscal cliff impasse also added to uncertainty that argues for a risk-off approach. You don’t want to go into the year-end with any particular amount of risk.”

The 10-year gilt yield fell eight basis points, or 0.08 percentage point, to 1.81 percent at 4:42 p.m. in London after dropping as much as nine basis points, the most since Nov. 18. The 1.75 percent bond due in September 2022 gained 0.68, or 6.80 pounds per 1,000-pound face amount, to 99.45.

Reid said a resolution to the U.S. budget dispute before Jan. 1 appears unlikely because Republicans won’t cooperate.

“I don’t know time-wise how it can happen now,” Reid, a Nevada Democrat, said on the Senate floor. He blamed House Speaker John Boehner and Senate Minority Leader Mitch McConnell, both Republicans.

Gilts returned 2.2 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 4 percent and Treasuries earned 2.1 percent.

‘Technical Bias’

“It isn’t too surprising to see a sudden jump in gilts given the seasonal illiquidity,” said Sam Hill, a fixed-income strategist at RBC Capital Markets in London. “With 10-year yields opening at 1.90 percent after the Christmas break, near the top of its range in the second half of the year, there was a technical bias for the market to consolidate.”

The pound weakened 0.1 percent to $1.6122 and dropped 0.2 percent to 82.08 pence per euro.

Sterling earlier rose as much as 0.4 percent against the dollar after an industry report showed bank lending for U.K. home purchases climbed last month.

Home Loans

The number of loans approved for house purchases rose to 33,634 in November from 33,128 in October, the British Bankers’ Association said in London. The gain was less than the median estimate of 34,500 from a Bloomberg News survey.

“The U.K. economy may be weak but there are signs that it has probably gone through the worst,” said Stuart Cole, a currency analyst at Mizuho Corporate Bank Ltd. in London. “If you look at the fundamentals, the U.K. is not doing too badly and that should be supportive for the pound.”

The pound has appreciated 1.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 0.5 percent and the dollar fell 2.8 percent.

The pound climbed to the strongest since April 2011 against the yen today after Japan’s Shinzo Abe was approved as prime minister for a second time yesterday by parliament. His Liberal Democratic party won a landslide victory in lower house elections on Dec. 16, pledging to weaken the currency.

The U.K. currency rose 0.3 percent to 138.56 yen after reaching 139.19 yen, the strongest since April 11, 2011.

Sterling has risen 3.7 percent versus the dollar and 1.6 percent against the euro in 2012. If it finishes stronger than 83.34 pence per euro, this will be the fourth year of gains, the longest winning streak since the introduction of the single currency in 1999.

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