U.K. Gilts Gain on Italy Concern, Pound Advances Against Euro
U.K. government bonds advanced, with shorter-maturities leading gains, as signs that the parliamentary coalition in Italy is losing support boosted demand for the relative safety of British debt.
Sterling rose for a second day against the euro after European Central Bank President Mario Draghi said policy makers had a “wide discussion” on interest rates before a policy decision today. The ECB and the Bank of England held their borrowing costs at record lows today. Fitch Ratings said the “credibility” of the U.K.’s fiscal policy was weakened by Chancellor of the Exchequer George Osborne’s admission he is missing his debt-reduction targets.
“Gilts are still a safe haven,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “The market is obviously not too concerned about any rating implications of yesterday’s statement. Italy could become quite nasty.”
The yield on two-year gilts fell five basis points, or 0.05 percentage point, to 0.25 percent at 4:10 p.m. London time. The 5 percent gilt due September 2014 rose 0.09, or 90 pence per 1,000-pound ($1,607) face amount, to 108.29. The rate on 10-year gilts dropped four basis points to 1.74 percent.
Italian Prime Minister Mario Monti today survived a confidence vote after former premier Silvio Berlusconi’s political party threatened to stop supporting the government, risking the disintegration of the parliamentary coalition.
The yield difference between 10- and 30-year gilts widened to the most in seven weeks after the government announced pension-plan revisions that may sap demand for longer-dated debt.
“There is a risk of a downgrade but the pension news we had yesterday is a bigger driver for gilts,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “Companies are currently having to buy longer-term bonds to plug their deficits. If they don’t have to value their future liabilities so harshly, they aren’t going to buy so many, so the price is falling.”
The yield on 30-year gilts fell four basis points to 3.09 percent, leaving the spread over 10-year yields at 135 basis points. It earlier climbed to 137 basis points, the most since Oct. 17.
The pound rose to a one-week high against the euro after Draghi said weakness in the region’s economy will persist into next year, leaving the door ajar for interest-rate cuts.
Speaking at a press conference in Frankfurt after policy makers left the ECB’s key rate unchanged at 0.75 percent, he said the central bank had cut its growth forecasts for the euro area and said it saw “downside risks” for the economy.
Sterling gained 0.6 percent to 80.73 pence per euro, and was 0.2 percent weaker at $1.6063.
Osborne told lawmakers yesterday that his fiscal watchdog, the Office for Budget Responsibility, believes he will miss his target to begin cutting the burden of government debt in 2015-16. Instead, debt as a share of gross domestic product will peak at 79.9 percent in that year, and then start to decline in following years, he said.
Fitch said yesterday that missing the targets “weakens the credibility of the U.K.’s fiscal framework, which is one of the factors supporting” the country’s AAA rating. France’s 10-year yield dropped to a record low for a second day even after Moody’s Investors Service cut its Aaa rating last month.
“I’m firmly in the camp that the market is way ahead of the rating agencies,” the U.K. Debt Management Office Chief Executive Officer Robert Stheeman said in an interview yesterday. “Rating agencies are lagging, not leading, indicators and it’s most likely that the market has already anticipated any move. For example, France has been downgraded and their yields touched an all-time low.”
The Bank of England’s Monetary Policy Committee, led by Governor Mervyn King, today maintained its so-called quantitative-easing target at 375 billion pounds, as predicted by all 36 economists in a Bloomberg News survey. The central bank’s key interest rate was also held, at a record-low 0.5 percent.
Gilts returned 2.8 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. U.S. Treasuries also gained 2.8 percent and French debt earned 9.6 percent.
Sterling has appreciated 1.2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro declined 2.4 percent and the dollar fell 2.5 percent.