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Gilts Rise for First Time in Seven Days as Safety Demand Revives

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Aug. 20 (Bloomberg) -- U.K. government bonds rose, with 10-year gilts advancing for the first time in seven days, as a slide in stocks around the world revived demand for the relative safety of Britain’s fixed-income securities.

Benchmark 10-year yields dropped from the highest level since August 2011 amid speculation the Federal Reserve will reduce its asset purchases that have helped underpin the global recovery. Treasuries and German bonds also rallied. Britain sold 1.75 billion pounds ($2.74 billion) of inflation-linked gilts. The pound strengthened to a two-month high against the dollar and weakened versus the euro.

“It’s generally a risk-off day,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “Equity markets are taking quite a significant pullback, probably leading most of this move in the fixed-income world, especially in the U.S.”

The U.K. 10-year yield fell eight basis points, or 0.08 percentage point, to 2.67 percent at 4:37 p.m. London time after climbing to 2.75 percent yesterday, the highest since Aug. 8, 2011. The 1.75 percent gilt due in September 2022 rose 0.595, or 5.95 pounds per 1,000-pound face amount, to 92.66.

Treasury 10-year yields dropped six basis points to 2.82 percent, while similar-maturity bund yields declined six basis points to 1.84 percent. The Stoxx Europe 600 Index of shares slid 08 percent.

Fed Minutes

The Fed will publish tomorrow the minutes of its July 30-31 meeting that may offer clues about when policy makers will start to reduce their $85 billion of monthly bond purchases. Officials will begin to trim the buying in September, according to 65 percent of economists surveyed by Bloomberg from Aug. 9-13.

The U.K. sold inflation-linked gilts due in November 2019 at an average real yield of minus 0.887 percent, drawing bids for 1.83 times the amount auctioned. A negative real yield means investors receive a return below inflation if they hold the securities to maturity.

The five-year break-even rate, a gauge of market inflation expectations derived from the yield difference between gilts and index-linked securities, declined for a third day, dropping three basis points to 2.66 percentage points. The rate fell to 2.64 percentage points on Aug. 12, the lowest since July 2.

The Debt Management Office said today it is planning at least one gilt sale through banks in the fourth quarter. The DMO will publish its gilt-sale calendar for next quarter on Aug. 30.

Gilts lost investors 4.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. German bonds dropped 2.4 percent and Treasuries declined 3.8 percent.

The pound strengthened 0.2 percent to $1.5673 after advancing to $1.5696, the highest level since June 18. The U.K. currency weakened 0.5 percent to 85.66 pence per euro.

Sterling has appreciated 5.7 percent in the past six months, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 3.6 percent and the dollar strengthened 2.4 percent.

To contact the reporter on this story: Morgane Lapeyre in London at mlapeyre@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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