U.K. Gilts Rise as Confidence Wanes Economic Slump Is Easing

By Lukanyo Mnyanda May 15 (Bloomberg)

U.K. gilts rose, putting the two-year yield on course for its biggest weekly drop in three months, after a report showed Europe’s economy slid the most in 13 years in the first quarter, driving investors to the safest assets.

The yield on the note fell below 1 percent for a third day. Gross domestic product in the 16-member euro region fell 2.5 percent from the fourth quarter, the European Union’s statistics office in Luxembourg said today. That’s the biggest drop since euro-area GDP figures were first compiled in 1995. The Bank of England said two days ago the U.K. faces a “slow” recovery.

“We’ve had a lot of bad news on the economy and that’s given gilts a fillip,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “We’ve seen some of the green-shoots turning brown and that’s helping” bonds.

The two-year yield fell three basis points to 0.99 percent as of 12:01 p.m. in London, after dropping to 0.97 percent. The price of the 4.25 percent note due March 2011 rose 0.03, or 30 pence per 1,000-pound ($1,517) face amount, to 105.81. The yield headed for its biggest weekly drop since Feb. 13.

The yield on the 10-year gilt decreased two basis points to 3.46 percent, extending its drop this week to 27 basis points. Bond yields move inversely to prices.

The two-year yield may stay near 1 percent for the next three to four months, Keeble said.

FTSE 100 Drops
Bonds climbed this week as falling stock markets and signs a recovery from the recession may be faltering spurred investors to buy the safest assets. The benchmark FTSE 100 Index of stocks was set to snap a four-week gain.

The Bank of England said this week that the economy may contract for the rest of the year and lending will take longer to resume than previously forecast. The bank left the key interest rate at 0.5 percent last week as unemployment rose in the first quarter by the most since 1981.

U.K. repossessions by mortgage lenders jumped by 51 percent in the first quarter, the Council of Mortgage Lenders said. Repossessions climbed to 12,800, compared with 8,500 in the same quarter in 2008, the group, which represents home-loan providers, said in an e-mailed statement today. The reading is up from 10,400 in the previous three months.

The increase was still less than the CML expected and the group may revise its forecast for a total of 75,000 this year, the statement said.

Pound Mixed
The pound declined 0.4 percent to $1.5179, on course for its first weekly decline in three. The British currency strengthened to 89.34 pence per euro, from 89.51 on May 8.

The U.K. currency lost 23 percent against the euro last year as the recession deepened, prompting the central bank to cut the benchmark main rate 4.50 percentage points since October to an all-time low of 0.5 percent. The European Central Bank reduced its main refinancing rate to 1 percent this month. 

British bonds lost investors 1.8 percent this year, while German notes declined 0.4 percent, according to Merrill Lynch & Co.’s U.K. Gilts and German Federal Governments indexes. Gilts earned investors 13 percent last year, the most since 1998, as Europe’s second-biggest economy slipped into a recession. 
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