Feb. 27 (Bloomberg) -- Gilts advanced for a third day after a government report showed the U.K. economy shrank last quarter, boosting demand for the relative safety of Britain’s debt.
Ten-year yields dropped to the lowest level in eight weeks as Bank of England Deputy Governor Charles Bean said policy makers were ready to add more monetary stimulus. U.K. bonds also rose amid speculation Italy faces a political vacuum after 5 Star Movement leader Beppe Grillo said his lawmakers wouldn’t vote confidence in any government. Today’s gain means gilts have risen every day since Moody’s Investors Service cut Britain’s credit rating last week. The pound weakened versus the euro.
“Now the downgrade is behind us we have the perfect backdrop for a rally in gilts,” said Jamal Meliani, a fixed-income analyst at Newedge Group in Paris. “There’s loose monetary policy, low growth and a demand for safe havens. That’s a very powerful mix.’”
The 10-year gilt yield dropped two basis points, or 0.02 percentage point, to 1.95 percent at 4:22 p.m. London time after falling to 1.93 percent, the lowest level since Jan. 2. The 1.75 percent bond due in September 2022 rose 0.13, or 1.30 pounds per 1,000-pound face amount, to 98.25.
The benchmark yield has declined 16 basis points since Moody’s lowered the U.K.’s rating to Aa1 from Aaa on Feb. 22. Investors including Pacific Investment Management Co. and Ignis Asset Management said the decision was unlikely to have a material impact on the country’s government bonds.
“We don’t expect that the rating cut will result in a badly performing gilt market,” said Andreas Burhoi, a money manager at DWS Investment in Frankfurt, Germany’s biggest mutual fund, which oversees $379 billion. “The Bank of England will provide any needed liquidity to support the gilt market and we expect further stimulus.”
Britain’s economy shrank 0.3 percent in the fourth quarter after expanding 0.9 percent in the previous three months, the Office for National Statistics said. The office revised its full-year data and said the economy grew 0.2 percent in 2012 instead of stagnating.
Bean said in a speech in London that while the central bank was ready to add more stimulus, there is “a danger of expecting too much” from monetary policy.
“We stand ready to take further such action should it be warranted,” he said. “But such policies cannot -- and should not seek to -- prevent the necessary deleveraging and rebalancing. That is a real process that takes time and means that the recovery is likely to remain somewhat subdued.”
Fellow Deputy Governor Paul Tucker said yesterday he is open to adding to asset purchases as policy makers stressed the Bank of England has the flexibility to boost stimulus if needed.
Gilts also rallied as Italy’s Grillo, whose populist movement was the top vote getter in parliamentary election this week, rejected a call by Democratic Party leader Pier Luigi Bersani to join a coalition. A failure to form a government is likely to set back steps to combat the nation’s debt crisis.
U.K. government bonds returned 2.7 percent over the past year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds gained 4.1 percent and Treasuries rose 2.2 percent.
The pound fell 0.3 percent to 86.61 pence per euro after sliding to 88.15 pence on Feb. 25, the weakest since October 2011. It was little changed at $1.5127 after dropping to $1.5073 on Feb. 25, the lowest since July 2010.
Sterling has overtaken the yen as the world’s worst-performing major currency this year amid speculation the Bank of England will add more monetary support to the economy.
Britain’s currency has fallen 5.4 percent in 2013, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The yen dropped 3.8 percent, while the dollar strengthened 2.5 percent.
“I don’t see why people should buy the pound,” said John Hardy, head of currency strategy at Saxo Bank A/S in London. “Low growth, high inflation and policy outlook should continue to pressure sterling. I need to see signs of more dynamism in the economy and signs of investment coming back to the U.K. to change that view.”
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