Gilts Rise on Italy Vote Concern, 10-Year Yield Drops Below 2%

U.K. government bonds rose, pushing 10-year yields below 2 percent for the first time in a month, as inconclusive elections in Italy boosted demand for the relative safety of British sovereign debt.

Benchmark gilts advanced for a second day as pre-election favorite Pier Luigi Bersani won Italy’s lower house by less than half a percentage point while former premier Silvio Berlusconi gained a blocking minority in the Senate. Italian and Spanish bonds slumped on concern the political uncertainty would deepen Europe’s debt crisis. Gilts have risen for two days even after Moody’s Investors Service cut the U.K.’s AAA credit rating last week. The pound dropped against the dollar and euro.

“Gilts, despite the downgrade, clearly remain in the club of safe-haven assets,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “When you have panic in the euro-region periphery, gilts are going to be a beneficiary of that.”

The 10-year gilt yield dropped 11 basis points, or 0.11 percentage point, to 1.97 percent at 4:27 p.m. London time after reaching 1.96 percent, the lowest level since Jan. 24. The 1.75 percent bond maturing in September 2022 rose 0.93, or 9.30 pounds per 1,000-pound ($1,513) face amount, to 98.085.

Bank of England Deputy Governor Paul Tucker said today that while threats to the U.K. from the euro-region have receded, it still remains a major concern.

Tucker, along with fellow Monetary Policy Committee members Charles Bean, David Miles and Ian McCafferty, was speaking before the U.K. legislature’s Treasury Select Committee.

Moody’s lowered the U.K.’s credit rating one level to Aa1 on Feb. 22, citing weakness in the nation’s growth outlook and challenges to the government’s plan to cut the deficit.

Spread Narrows

Gilts have traded in line with German bunds since the downgrade. The extra yield investors demand to hold Britain’s 10-year benchmark securities instead of bunds was 52 basis points today, little changed from at the end of last week.

The U.K. sold 3.75 billion pounds of inflation-linked gilts maturing in March 2052 through banks, the Debt Management Office said on its website. The bonds were priced at 105.312, for a so-called real yield of 0.111 percent, the office said.

Index-linked gilts advanced, pushing the yield on the 10-year securities down to a record-low minus 1.16 percent.

The U.K.’s 10-year break-even rate, a measure of future inflation expectations, narrowed as much as eight basis points to 3.12 percentage points, the least since Jan. 30.

U.K. government bonds lost 1.9 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds dropped 1.1 percent and Treasuries fell 0.2 percent.

Pound Drops

The pound fell 0.2 percent to $1.5132 after weakening to $1.5073 yesterday, the lowest level since July 2010. Sterling slid 0.2 percent to 86.31 pence per euro after depreciating to 88.15 pence yesterday, the weakest level since October 2011.

The U.K. currency has lost 5.3 percent this year, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 2.6 percent and the euro rose 1.4 percent.

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