U.K Government Bonds Advance as U.S Bank-Rescue Plan Stalls

By Andrew MacAskill and Lukanyo Mnyanda

Sept. 26 (Bloomberg) -- U.K. government bonds rose as U.S. lawmakers failed to broker a deal on a $700 billion plan to buy troubled assets from financial institutions, prompting investors to seek the safest assets.

Two-year notes headed for their secondly weekly gain as congressional leaders were deadlocked over the details of a rescue plan that would calm markets. The Bank of England, along with regional central banks, said it agreed to allow lenders to borrow dollars from them for a week in a fresh effort to ease money markets.

``We are just caught in the ebb and flow related to the announcement of the U.S. package,'' said Sean Maloney, a fixed- income strategist in London at Nomura International Plc. ``Gilts may grind a little higher but we can't get carried away because sentiment is very fragile.''

The yield on the 10-year note fell 7 basis points to 4.55 percent as of 1:54 p.m. in London. The 5 percent security due March 2018 gained 0.52, or 5.2 pounds per 1,000-pound ($1,841) face amount, to 103.42. The yield on the two-year note declined 7 basis points to 4.25 percent. Bond yields move inversely to prices.

U.K. Prime Minister Gordon Brown urged Congress yesterday to back the plan for financial companies as European finance ministers expressed concern market turmoil will damage the world economy. Brown is scheduled to meet President George W. Bush today to discuss the economy.

Demand for the safety of government debt increased as stock markets worldwide dropped. The MSCI World Index fell 0.7 percent and the U.K.'s FTSE 100 Index declined 1.9 percent.

Extend Gains

Gilts extended their gains after comments by Republican Senator Richard Shelby on the bailout plan and the release of lower-than-expected U.S. economic-growth figures.


Shelby suggested in an interview with CNBC that opponents of the Paulson bailout were in no hurry to reach an agreement. He said the plan was ``flawed'' and that he could let markets open on Monday without a deal.

They also rose after figures showed the U.S. economy grew 2.8 percent in the second quarter, less than the 3.3 percent forecast by economists surveyed by Bloomberg.

HSBC Holdings Plc, Europe's largest bank by market value, cut 1,100 jobs in its global banking and markets division as the deepening financial crisis threatens to extend a decline in profit. Money market rates have soared as banks have all but stopped lending to each other. The three-month London interbank offered rate, or Libor, that banks charge each other for borrowing dollars stayed near the highest level since January.

Central Banks

With the cost of borrowing dollars jumping, the European Central Bank, Swiss National Bank and Bank of England began auctions today totaling $74 billion in one-week funding. The Bank of England said it loaned $30 billion in one-week loans and $10 billion overnight.

Bank of England policy maker Andrew Sentance said today members of the Monetary Policy Committee face a ``difficult balancing act'' in setting rates to tame prices while growth slows, the Leicester Mercury newspaper reported. There is a threat the fastest inflation in a decade may persist even as the financial crisis raises the chance of the bank undershooting its target for consumer prices, policymaker Kate Barker said yesterday.

The pound climbed against the dollar, headed for a third- weekly gain. The British currency advanced to $1.8414 per dollar, from $1.8372 yesterday, and is 0.5 percent higher in the week. Against the euro, the pound was little changed 79.48 pence per euro, down 0.7 percent since Sept. 19.

Expect Volatility

``The major event of the day for sterling is coming from the U.S.,'' said Ian Stannard, a currency strategist in London at BNP Paribas SA, the most accurate currency forecaster in a 2007 Bloomberg News survey. ``Until a deal is agreed we can expect volatility and some spikes to the upside.''

The pound's trade-weighted index, a gauge of the currency's performance against Britain's major trade partners, was little changed at 87.33, according to Deutsche Bank AG. The gauge, down 0.3 percent this week, has dropped 7.8 percent in 2008.

British policy makers kept the benchmark interest rate unchanged on Sept. 4 as they weighed the risks of accelerating inflation against the danger that mounting bank losses will push Europe's second-biggest economy into a recession. The next Bank of England decision is Oct. 9.

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.netLukanyo Mnyanda in London at lmnyanda@bloomberg.net;