U.K. Yields Drop Below U.S. After Italy Downgrade; Pound Weakens

U.K. government bonds advanced, with 10-year yields falling below those of similar-maturity Treasuries for the first time in five months, as investors sought haven assets after Fitch Ratings downgraded Italy.

The spread inverted for the first time since October as the allure of U.S. debt dimmed on speculation the Federal Reserve will scale back stimulus after the unemployment rate fell to a four-year low. Gilt yields slid from a two-week high as the Bank of England began reinvesting the proceeds of its asset-purchase program. Fitch cut Italy’s rating one level citing political instability that has sent the nation’s bond yields higher. The pound dropped to the least since June 2010 against the dollar.

U.S. jobs data “have a material bearing on how market participants view the likelihood of ongoing asset purchases from the Fed,” said Sam Hill, a fixed-income strategist at Royal Bank of Canada in London. “That’s what’s causing the U.S. to underperform. Gilts are making a little bit of ground back from the weak point on Friday because of news of the Fitch downgrade of Italy.”

The 10-year gilt yield slid five basis points, or 0.05 percentage point, to 2.01 percent at 4:37 p.m. London time. The rate climbed to 2.07 percent on March 8, the most since Feb. 25. The 1.75 percent bond maturing in September 2022 rose 0.42, or 4.20 pounds per 1,000-pound ($1,490) face amount, to 97.75.

Spread Widens

The Treasury 10-year note yield was little changed at 2.05 percent, widening the spread over gilts to four basis points, from minus two basis points at the end of last week.

German bunds rose and Italian bonds fell after Fitch lowered Italy’s sovereign rating to BBB+ from A- with a negative outlook after markets closed on March 8.

The U.K. central bank will buy bonds in three auctions a week, it said March 7. The bank will purchase gilts with a residual maturity of three to seven years on Mondays, of more than 15 years on Tuesdays, and of seven to 15 years on Wednesdays. The Bank of England bought 1.1 billion pounds of debt today with the proceeds of gilts acquired through its stimulus measures.

U.S. central bank officials have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. The U.S. economy will expand 1.8 percent this year compared with 1 percent in the U.K., according to median estimates compiled by Bloomberg News.

“In recent years it’s been very unusual for gilts to trade through Treasuries,” said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “The question this time is whether it continues because of the divergent growth prospects.”

Citigroup Prediction

Citigroup forecasts the 10-year gilt yield will climb to 2.5 percent in the third-quarter, Searle said.

The pound declined 0.2 percent to $1.4901, after falling to $1.4866, the least since June 25, 2010. Sterling depreciated 0.3 percent to 87.34 pence per euro. It reached 88.15 pence on Feb. 25, the weakest level since Oct. 31, 2011.

The U.K. currency may rebound towards $1.5223 if it holds above a level of so-called support at $1.4856, the 61.8 percent Fibonacci retracement of its advance between November 2009 and May 2010, according to David Sneddon, head of technical analysis at Credit Suisse AG in London.

“We continue to expect this retracement support level to hold and for the market to rebound higher once again,” Sneddon wrote in an e-mailed note today.

If sterling breaks through the $1.4856 level, it could slide to $1.4688, he wrote.

The pound has dropped 6.3 percent this year, the second-worst performer after the yen among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro rose 1.6 percent and the dollar gained 3.2 percent.

U.K. government bonds lost 1.7 percent this year through March 8, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds dropped 0.9 percent and Treasuries fell 1 percent.

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