British bonds win 'safe haven' tag in eurozone debt storm

20th November 2011, Comments 0 comments

British government bonds are attracting strong support, in sharp contrast to their troubled eurozone peers as investors seek a safehaven from a debt crisis now spreading to Italy, Spain and even France.

British government bonds, or gilts as they are known, are in huge demand largely because the Bank of England is buying them up with newly-created money that it hopes can in turn be used to stimulate an anaemic economic recovery, analysts say.

But investors are also reassured by the British coalition government's determined efforts to slash state debt and avoid the severe troubles that have snared the crisis-hit eurozone trio of Greece, Ireland and Portugal.

Britain is not a member of the eurozone but relies on the region for much of its trade.

British "gilts have continued to benefit from an apparent safehaven status, with yields at most maturities close to record lows," said Barclays Capital analyst Henry Skeoch.

David Morrison, an analyst at trading group GFT, said "gilts are acting as a safe haven, along with US Treasuries and Japanese government bonds.

"Even German Bunds (bonds) are losing their appeal as investors express their concerns about how Germany will ultimately be affected by problems in the bigger eurozone countries -- Spain, Italy and France."

British 10-year government bond yields last week tumbled as low as 2.1 percent and stood only slightly higher at 2.2 percent by Friday.

By comparison, the yield on Italy's 10-year government bonds topped the 7.0-percent danger level considered unsustainable for Rome to service its huge debts while Spanish rates have also approached this crucial point.

German 10-year yields -- the rate of return earned by the holder of the bond -- stood at 1.9 percent Friday, with France at around 3.5 percent.

"I think being outside the eurozone is a key factor" for Britain's low rates, said Colin Ellis, economist at the British Private Equity and Venture Capital Association.

"At the end of the day, the UK having its own currency makes a big difference."

He added: "In contrast to the European Central Bank, the Bank of England has been willing to buy up vast swathes of UK government debt.

"Another factor though is the government's tough line on deficit reduction. It is very clear now that they really are prioritising the reduction in the deficit, rather than supporting economic activity or job creation, over the next few years," Ellis said.

Britain's Conservative-Liberal Democrat coalition which came to power last year has sought to slash public spending and increase taxes so as to cut a record deficit inherited from the previous Labour administration.

The Bank of England meanwhile decided in October to increase its quantitative easing (QE) programme by £75 billion (86 billion euros, $115 billion) to £275 billion over a four-month period.

Under QE, the British central bank creates new cash which is used to purchase government and corporate bonds in a bid to encourage lending and boost economic activity.

The central bank injected £200 billion into the economy between March 2009 and January 2010 but the economy has struggled to recover after exiting a deep recession sparked by the 2008 global financial crisis.

"The reason that gilts are outperforming, despite horrible UK fundamentals, is because the Bank of England has been 'printing money'" said Stephen Gallo, analyst at Schneider Foreign Exchange.

"Without that ... we would be in a situation where gilt yields would be rising."

British bond yields are low even though the European Commission forecasts Britain's public deficit to hit 9.4 percent of gross domestic product in 2011 -- above the EU estimate of 8.9 percent for bailed-out Greece.

The EU is also predicting total British public debt to reach 84 percent of GDP this year, while key eurozone player France will be only slightly higher at 85.4 percent.

At the same time, the EU expects the flagging British economy to grow by just 0.7 percent this year, which places it among Europe's weakest.

© 2011 AFP

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