Thursday, February 12, 2009

Gilded Age for Gilts as U.K. Signals Buying Plans

By MIN ZENG Investors in the U.K. government debt market are set to reap a windfall from the Bank of England. BOE governor Mervyn King signaled that the central bank may cut interest rates further and is likely to start buying domestic government bonds to jump-start lending and pull the economy out of recession. The BOE's key interest rate is already at a record low of 1%. Bank of England Governor Mervyn King delivers his first keynote address of the year at a Confederation of British Industry dinner in Nottingham, central England, Jan. 20, 2009. That points to a boom time for U.K. government debt, known as gilts, because the bank's purchases will help raise demand and push up bond prices. But international investors, with an eye on currency markets, will need to hedge their exposures carefully: While gilts rallied on Mr. King's comments on Wednesday, with two-year and 10-year yields dropping at least 0.2 percentage point, the pound slid. The BOE's aggressive stance on expanding the money supply by buying government debt, a hallmark of quantitative easing, contrasts with that of its counterparts in the U.S. and the euro zone. The Federal Reserve is focused on its loan facilities to boost consumer and business lending. U.S. central bankers also have made it clear that they will buy Treasurys only if such purchases are deemed "particularly effective" in bringing down private borrowing costs. The European Central Bank has expressed doubt on the effectiveness of the quantitative easing and has lagged behind the BOE and the Fed in cutting rates. "There is a chance that gilts will outperform Treasurys and [German] bunds, as yields will continue to go down," said Andrew Popper, chief investment officer at SG Hambros Bank in London. On Wednesday, the 10-year gilt's yield was 3.397%, compared with 2.759% on the 10-year U.S. Treasury note and 3.182% on 10-year German bunds. With gilt yields firmly above those in the U.S. and the euro zone, there is more room for price gains in the U.K. government bond market. Lingering doubts on the effectiveness of quantitative easing in lowering private lending rates were evident in the swaps market, the ultimate risk gauge in fixed-income markets, where U.K. swap spreads widened sharply. "The markets are telling you that they are buying the wrong instruments and they mightn't get the credit flow to corporate bonds," said Stuart Sparks, interest-rate strategist at Credit Suisse Group. Issuers Offer $1 Billion in High-Yield Market Three new junk-bond deals came to market, taking advantage of a window of opportunity for higher-rated speculative-grade credits as risk premiums for new notes have fallen. Chesapeake Energy priced $425 million of senior notes due 2015 through lead manager Bank of America. The notes, raised from an initially planned $300 million, sold with a coupon of 9.5% at a discounted face value of 97.75 cents on the dollar to yield 10%, according to KDP Investment Advisors. Chesapeake's notes were rated Ba3 by Moody's Investors Service and BB by Standard & Poor's, high on the speculative-grade ladder. Also in the primary market, Forest Oil was selling $350 million of senior notes due 2014 via J.P. Morgan Chase, and health-care company HCA was in the market with a $300 million offering of eight-year second-lien notes. —Michael Aneiro

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