Bank of England stimulus aids the Gilts to outperform German Bunds

U.K. Gilts Outperform Bunds on BOE Stimulus Bets

By David Goodman and Anchalee Worrachate – Jun 16, 2012 7:50 AM GMT+0100

U.K. two-year note yields fell for a second week on speculation the Bank of England will buy more government debt to support the economy.

Ten-year bonds outperformed German bunds, narrowing the spread between the securities to the lowest in more than three months, on concern Greece will be pushed toward an exit from the euro after tomorrow’s election. Bank of England Governor Mervyn King presented joint steps with the Treasury to increase the flow of credit to U.K. banks and said the case for more stimulus is “growing.” The pound gained against most of its peers.

King’s “announcement highlights the bias is for further easing in U.K.,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “The U.K. is also benefiting from being outside the euro zone. There is definitely some concern over how much it will all cost Germany.”

Two-year yields slid two basis points, or 0.02 percentage point, this week to 0.22 percent at 4:28 p.m. London time yesterday. The 2.25 percent security due March 2014 traded at 103.49 percent of face value. The 10-year gilt yield rose four basis points to 1.67 percent.

German 10-year yields rose 12 basis points to 1.45 percent, narrowing the spread with gilts to 22 basis points, the smallest gap since Feb. 28, according to closing prices.
Liquidity Plan

The Bank of England’s liquidity plan will see it inject at least 5 billion pounds a month into the financial system. A separate program will allow lenders to swap assets with the central bank in return for money to be loaned to companies and households.

U.K. policy makers held the bond-purchase program at 325 billion pounds and kept their benchmark rate at a record-low 0.5 percent on June 7. Minutes of the meeting, showing how officials voted, will be published on June 20.

Greece’s second election in two months hinges on whether the nation accepts austerity to stay in the euro or rejects the conditions of bailouts and risks becoming the first to exit the 17-member currency.

George Osborne, U.K. Chancellor of the Exchequer, warned against the dangers of a disorderly Greek exit from the euro area and backed deposit insurance for the currency bloc’s banks.

“The worst thing for the world would be a Greek exit without a plan to deal with the contagion, because that would be like letting Lehman Brothers go and not having a plan for the day after,” Osborne said in excerpts of a CBS Evening News interview scheduled for broadcast late yesterday. Osborne spoke two days before Greek voters go to the polls in an election that may decide whether the nation leaves the 17-nation euro area.
Pound Gains

The pound rose 0.2 percent to 80.74 pence per euro and strengthened 1.2 percent to $1.5655. It gained against most of its 16 major peers this week.

The U.K. is due to sell 3.25 billion pounds of 10-year gilts the next day.

Sterling slid 2.5 percent in the past month, the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. currency fell 0.2 percent and the euro dropped 1 percent.

Gilts have returned 1.4 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies as of June 14. German bunds rose 2.6 percent, and U.S. Treasuries gained 1.7 percent.

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