March 19 (Bloomberg) -- U.K. government bonds rose, pushing 10-year yields to the lowest level this year, as the European Union’s insistence that Cyprus raises cash from bank depositors threatened to deepen the euro region’s debt crisis.
Benchmark 10-year gilts advanced for a fourth day as Cyprus’s parliament started a debate on the proposal, which if rejected may risk the island’s membership in the euro. EU finance chiefs have demanded Cyprus raise 5.8 billion euros ($7.51 billion) from bank depositors in order to receive emergency loans. The pound rose to a five-week high versus the euro after a government report showed inflation accelerated to the fastest pace in nine months in February.
“It’s the Cyprus stuff that people are looking at,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “While there have been points where the gilt market’s safe-haven status has been more open to question than in the past, that was in the absence of a flare up in euro-area risks. There’s an acceptance that there’s still merit in resorting to gilts at times of difficulty.”
The 10-year gilt yield fell seven basis points, or 0.07 percentage point, to 1.83 percent at 5 p.m. London time, the lowest level since Dec. 28. The 1.75 percent bond due in September 2022 gained 0.565, or 5.65 pounds per 1,000-pound ($1,511) face amount, to 99.31.
The debate in Cyprus’s parliament is being televised live on state-run RIK TV. The proposed levy on deposits, announced on March 16, sparked concern among investors about setting a precedent by breaking the taboo against raiding bank accounts.
The “feeling I’m having is that the house is going to reject it because they feel and think it isn’t just and that it’s against the interest of Cyprus,” the country’s President Nicos Anastasiades told Sweden’s TV4 channel.
U.K. government bonds returned 5.8 percent during the past year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds rose 5.6 percent and U.S. Treasuries gained 3.3 percent.
The pound strengthened for a second day against the euro after the Office for National Statistics said U.K. consumer prices increased 2.8 percent from a year earlier, the most since May, and up from 2.7 percent in January.
The U.K. currency climbed 0.7 percent to 85.14 pence per euro after appreciating to 85.05 pence, the strongest level since Feb. 11. Sterling was little changed at $1.5111.
The pound has gained 2 percent in the past week, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro fell 1 percent and the dollar gained 0.5 percent.
Investors should bet the pound will weaken against the dollar due to a number of key event risks tomorrow, according to Barclays Plc.
Sterling will decline if Chancellor of the Exchequer George Osborne announces a change to the remit for the central bank in the 2013 budget, allowing greater tolerance of above-target price increases, Raghav Subbarao, a foreign-exchange strategist in London, wrote in a note to clients.
“The budget presents an obvious opportunity to announce a change in the BOE’s remit and this lowering of the barrier for further easing should weigh on the pound,” he wrote.
Any change in voting patterns in the Bank of England minutes to be released tomorrow also poses a risk to the pound, Subbarao said.
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