Gilts Rise Second Day as Euro-Area Production Drops; Pound Falls

U.K. government bonds rose for a second day as euro-area industrial production unexpectedly declined in November, underpinning demand for safer assets.

Two-year yields dropped to the lowest level in more than a week amid concern U.S. lawmakers will struggle to reach agreement to increase the nation’s debt limit, potentially slowing growth in the world’s largest economy. U.K. 10-year yields have fallen around 10 basis points since climbing to the highest since April this month. The pound weakened against all except one of its 16 major counterparts before the government releases inflation data for December tomorrow.

The gain in gilts is “a sign that for all the optimism at the start of the year and the rally in risk assets, there’s still a lot of question marks,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “The scale of the jump in yields at the start of the year all looked a bit premature.”

The 10-year gilt yield fell five basis points, or 0.05 percentage point, to 2.04 percent at 4:50 p.m. London time after climbing to 2.14 percent on Jan. 4, the highest since April 30. The 1.75 percent bond due September 2022 rose 0.39, or 3.90 pounds per 1,000-pound ($1,606) face amount, to 97.50.

The two-year yield declined one basis point to 0.38 percent after dropping to 0.36 percent, the least since Jan. 2.

Euro-area output slid 0.3 percent from October, when it declined 1 percent, the European Union’s statistics office said. Economists forecast an increase of 0.2 percent, according to a Bloomberg News survey. Italian production declined 1 percent from October, the national statistics office said in Rome.

Debt Ceiling

The U.S. reached its debt ceiling on Dec. 31 and without an extension the Treasury will exhaust measures to finance the government as early as mid-February, the Congressional Budget Office has said.

Gilts have handed investors a loss of 1.8 percent this year through Jan. 11, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. They returned 2.8 percent in 2012.

The pound dropped the most in a week against the dollar as economists forecast data tomorrow will show retail price inflation held at 3 percent last month, while consumer prices inflation was at the quickest since May for a third month.

‘Quite Poor’

“The outlook for growth in the U.K. is quite poor over 2013 and on top of that you have a situation of slightly higher inflation, certainly than the rest of Europe,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG in London. “That’s normally not a good combination for a currency and as a result you’re seeing sterling weaken significantly.”

Sterling also fell against the euro as Prime Minister David Cameron told BBC Radio 4 today he’s in favor of U.K. membership of the European Union, while wanting a changed relationship that he would put to British voters for consent.

“Right now there’s not a lot of good news out of the U.K. and foreign investors don’t understand what the prime minister is trying to do vis-a-vis Europe,” said Yannick Naud, a London-based portfolio manager at Glendevon King Ltd. who helps oversee about $160 million in assets. He spoke on Bloomberg Television’s “The Pulse” with Francine Lacqua and Guy Johnson.

The U.K. currency declined 0.4 percent to $1.6072 after falling as much as 0.6 percent, the biggest decline since Jan. 3. The pound depreciated 0.5 percent to 83.16 pence per euro after dropping to 83.25 pence, the weakest since April 4.

The pound depreciated 1.1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro strengthened 1.4 percent while the dollar weakened 0.3 percent.

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