Sterling hits 12-year low on gilts sell-off

The Financial Times ^ | 11/11/2008 | Peter Garnham, David Oakley, Chris Giles and Jim Pickard

[bruinbirdman]

Sterling fell to a 12-year low against a basket of currencies on Tuesday and briefly fell to its lowest level against the euro since the single currency was introduced amid signs that foreign investors are deserting British assets.

Since mid-September UK fixed income instruments, which consist of gilts, corporate bonds, shorter maturing bills, and mortgage securities have seen extremely heavy outflows, according to data from the Bank of New York Mellon. This has coincided with a sharp fall in sterling.

According to the bank’s data, the net outflows of foreign investment from UK fixed income instruments seen over the past two months wiped out about 75 per cent of the net purchases that were seen between November 2004 and mid-September 2008.

In contrast, the outflows from eurozone debt in the past two months equalled about 25 per cent of the inflows between November 2004 and mid-September 2008, while those from US and Japanese paper added up to a more modest 15 per cent of prior purchases.

The yields on gilts have not risen significantly yet in response to Gordon Brown’s pledge to increase borrowing to pay for tax cuts, but analysts said the loss of confidence in the UK could limit the government’s scope to deliver a fiscal stimulus as it struggles to attract funds from overseas, potentially pushing up borrowing costs to lure investors.

With Britain’s sizable trade deficit, financial assets need to attract foreign buyers to prevent sterling from falling. Until last year, the boom in mortgage-backed securities and the attractiveness of gilts attracted huge inflows of foreign cash.

But when Mervyn King, the Bank of England governor, likened the UK to a vulnerable emerging market last month pointing out that foreign inflows to the banking sector had “fallen sharply”, he pulled the rug out from under sterling.

Since his speech in late October, the pound has fallen more than 6 per cent against the currencies of Britain’s main trading partners.

More than 5,800 job losses were revealed on Tuesday with Virgin Media, Taylor Wimpey and Yell all announcing large cuts.

Sterling fell another 1.2 per cent against the US dollar to $1.5425 and hit a record low of £0.8214 against the euro. The Bank of England’s trade-weighted sterling index slumped to 84.5, its weakest level since 1996.

Analysts attributed the loss of confidence in Britain’s currency to worries about the UK economy.

Simon Derrick, a strategist at Bank of New York Mellon, said on Tuesday: “There could be a raft of reasons for the outflows, such as worries over the UK economy, which is expected to see the worst recession of all the G7 nations, or concerns over the rising funding requirements to recapitalise some of the UK banks.”

The loss of confidence has not directly hit demand for gilts yet but Robert Stheeman, chief executive of the Debt Management Office, which runs gilt issuance, has warned that the government could face problems securing enough demand for its bonds as issuance is likely to rise to £110bn this financial year, nearly double the figure of £58.5bn last year.

[April Lexington]

These are not good times for the Anglosphere. But don't worry. We'll be back stronger than ever!