U.K. government bonds advanced, pushing 10-year yields down the most in more than three years, as Europe’s leaders prepared to discuss Greece’s future after the nation voted to reject demands for more austerity.
The yield dropped to the lowest in more than a month as Greek Prime Minister Alexis Tsipras arrived in Brussels in a last-ditch attempt to secure a deal with creditors. A report showed U.K. factory output unexpectedly contracted in May, stoking investor appetite for haven assets just as Chancellor of the Exchequer George Osborne prepares to announce a special budget on Wednesday.
“The main driver remains Greece and appetite for risk assets,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “There’s a good chance the Chancellor could downgrade borrowing prospects. That should be mildly supportive for gilts.”
Benchmark 10-year gilt yields fell 18 basis points, or 0.18 percentage point, to 1.83 percent as of 4:43 p.m. London time, the biggest drop since November 2011. The 5 percent bond due in March 2025 rose 1.765, or 17.65 pounds per 1,000-pound ($1,544) face amount, to 127.97.
Thirty-year yields fell 14 basis points to 2.61 percent after the U.K. sold 1.75 billion pounds of 2045 bonds. They attracted bids equivalent to 1.89 times the amount allotted, the highest bid-to-cover ratio in nine months.
The pound dropped 1.1 percent to $1.5439 and touched $1.5414, the lowest since June 10. Sterling was little changed at 70.80 pence per euro, having touched 70.56 pence on Monday, the strongest level this month.
Germany’s 10-year yield tumbled 12 basis points to 0.64 percent.
Gilts earned 0.3 percent in the past month through Monday, compared with an average loss of 0.6 percent for euro-area securities, according to Bloomberg World Bond Indexes.
While that’s a reflection of investor demand for safer assets as the Greek crisis worsens, it’s also a sign of support for gilts amid signs the U.K. recovery is losing momentum. That may prompt the Bank of England to keep interest rates lower for longer.
Manufacturing production shrank 0.6 percent in May from the previous month, official data showed Tuesday, whereas economists surveyed by Bloomberg had predicted an increase of 0.1 percent.
With factory output still 4.6 percent below its pre-recession peak, Britain is at risk of a “two-tier” economy with growth increasingly depending on consumers, the British Chambers of Commerce said in a separate report.