Romance Insider - U.K. Gilts Advance After Bear Gets Emergency Bailout From Fed
U.K. Gilts Advance After Bear Gets Emergency Bailout From Fed
U.K. government bonds rose after Bear Stearns Cos. got an emergency bailout from JPMorgan Chase & Co. and the Federal Reserve, stoking concern credit-market losses are spreading.
Gilts climbed for a second day, paring their first weekly decline in three, as stocks plummeted after Bear Stearns said its cash position had “significantly deteriorated.” The U.K.’s FTSE 100 Index reversed a weekly gain after the U.S. securities firm dropped as much as 53 percent in New York Stock Exchange composite trading to the lowest level in a decade.
“This really shows just how dire the situation in the U.S. banking sector is,” said Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh. “As expected, risky assets such as stocks have sold off, while government bonds remain very well- supported. After Bear’s announcement, clearly the risk is that other banks are likely to be facing serious troubles.”
The yield on the two-year note fell 7 basis points to 3.80 percent by 4 p.m. in London. The price of the 5.75 percent security due December 2009 climbed 0.11, or 1.1 pounds per 1,000- pound ($2,031) face amount, to 103.22.
Ten-year gilt yields slipped 5 basis points to 4.31 percent. Two-year yields notes fell in the week, with the yield advancing 6 basis points. Yields move inversely to bond prices.
Investors sought the relative safety of government bonds as stocks reversed earlier gains. The U.K.’s FTSE 100 Index dropped 1.2 percent, while the Dow Jones Stoxx 600, a benchmark for Europe, fell 1.3 percent. In the U.S., the Standard & Poor’s 500 lost 1.7 percent, the most in a week.
`Safe-Haven Flows’
“The Bear Stearns plan is basically a rescue plan and it’s bad news,” said Jose Garcia-Zarate, a London-based fixed-income strategist at 4Cast Ltd. “People are wanting to preserve capital and we’re seeing safe-haven flows into the core markets.”
The pound fell against the dollar, still headed for a fifth weekly gain as traders pared bets on interest-rate cuts, even after the announcement on Bear Stearns.
Britain’s currency traded 0.2 percent lower at $2.0298, poised for a 0.8 percent advance in the week. The pound was little changed at 76.86 pence per euro.
“We’re less dovish than the market on how much the Bank of England will lower rates this year,” said Daragh Maher, a senior currency strategist at Calyon, the investment-banking arm of Credit Agricole SA. “They’re going at a measured pace.”
Today’s advance in gilts pared a weekly decline. Bonds fell in the week on speculation accelerating inflation in Europe’s second-biggest economy will encourage the Bank of England to slow the pace of any interest-rate cuts, even as the fallout from the U.S. subprime-mortgage collapse spreads across the Atlantic.
Gieve on Inflation
U.K. central bank Deputy Governor John Gieve said today curbing inflation is “absolutely key” to policy makers.
A bank report yesterday showed expectations for price growth rose to the highest since 1999. British consumers predict prices will increase 3.3 percent in the next 12 months, up from 3 percent in November and the highest median result since the report started in 1999, according to the Bank of England report. The survey by GfK NOP Ltd. included 3,985 responses collected from Feb. 7 to Feb. 19.
The spread, or difference in yields, between two- and 10- year U.K. securities was at 51 basis points, down from 57 basis points a week ago as traders reduced wagers borrowing costs will fall. The spread was at a 4 1/2-year high of 61 basis points on March 10.
Two-year notes fell the most in a decade March 12 after the U.K. government said it will sell a record amount of debt in the next fiscal year. The announcement followed Chancellor of the Exchequer Alistair Darling’s debut budget speech to parliament.
The implied yield on the U.K.’s interest-rate futures contract due June climbed 6 basis points today and 24 basis points this week to 5.61 percent.
The Bank of England will cut its main rate from 5.25 percent to 5 percent by midyear, 4.75 percent by the end of the third quarter and 4.5 percent by year-end, according to the weighted average of 20 responses to a Bloomberg survey.
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