U.S. Treasuries Gain Most Since 1981; Longer-Term Yields Plunge

By Liz Capo McCormick

Nov. 29 (Bloomberg) -- Treasuries gained the most in November since Ronald Reagan was in the White House, in a month that saw voters elect Democrat Barack Obama president and the U.S. government pledge to spend up to $800 billion more to unfreeze credit markets.

Yields on 10- and 30-year U.S. debt touched record lows as investors piled into longer-dated securities on speculation the shrinking economy will subdue inflation. Reports showed durable- goods orders fell more than double the pace forecast, consumer spending dropped the most since 2001 and the economy contracted in the third quarter more than estimated. The cost of living decreased the most on record, a Nov. 19 report showed.

“There is a weak economy with inflation on the backslide now,” said Kevin Giddis, head of fixed-income sales, trading and research at the brokerage Morgan Keegan Inc. in Memphis, Tennessee. “It is a lot easier to buy longer-term Treasuries. You can see easily another 30-basis-point drop in the 10-year yield just on the inflation outlook alone.”

The yield on the 10-year note plummeted 31 basis points, or 0.31 percentage point, this week to 2.93 percent, according to BGCantor Market Data. It touched 2.90 percent yesterday, the lowest since the Federal Reserve’s daily records on the note began in 1962, and since 1958 on a monthly basis. The 3.75 percent security due in November 2018 climbed 2 22/32, or $26.88 per $1,000 face amount, to 107 2/32.

The 30-year bond’s yield tumbled 27 basis points for the week to 3.44 percent. It touched 3.43 percent yesterday, the lowest since regular sales of the security started in 1977.

The two-year note’s yield fell 12 basis points to 0.98 percent, down from 1.1 percent the prior week and from 1.55 percent at the end of October. It touched 0.95 percent on Nov. 20, the lowest since regular sales began in 1975.

Most Since 1981

Treasuries returned 5.07 percent this month, Merrill Lynch & Co. indexes showed. It was the most since October 1981, when former Fed Chairman Paul Volcker was battling to tame inflation that was running at more than 10 percent. Obama on Nov. 26 appointed Volcker, 81, to head a new White House economic board that will propose ways to revive growth.

The difference in yield, or spread, between two- and 10- year notes narrowed for the second week, reaching 1.94 percentage points. The so-called yield curve was at 2.62 percentage points on Nov. 13, a five-year high.

The Consumer Price Index fell 1 percent last month, the Labor Department said this week. Gross domestic product slid an annualized 0.5 percent in the third quarter, more than initially estimated, the Commerce Department said. Orders for durable goods fell by 6.2 percent in October, the Census Bureau said.

Deflation Factor

The reports, and an S&P/Case-Shiller home-price index reading showing that the decline in home prices accelerated, signaled credit markets remain locked. They also raised the possibility of a downward spiral as lenders cut back credit, causing spending to tumble and companies to slash investments and payrolls.

“The primary driver behind the fall in Treasury yields this month was the deterioration in the economy and the sinking realization that deflation could be a factor of life going forward,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 17 primary dealers that trade government securities with U.S. central bank. “You put everything together and 10-year and 30-year Treasuries provided a lot of value.”

Supply Issue

Bonds also rallied this week after the U.S. announced a plan to buy as much as $600 billion of debt issued or backed by government-chartered housing-finance companies. The plans spurred demand for Treasuries as a replacement for bonds backed by home loans that now may be repaid early as mortgage rates decrease.

The government also will set up a $200 billion program to support consumer and small-business loans.

Investors seeking the safest assets kept yields on three- month Treasury bills yesterday at 0.04 percent, where they have been since Nov. 26. The yields dropped to 0.01 percent on Nov. 21, the lowest level since the 1940s, according to monthly figures from the central bank.

“The only thing negative for the bond market is the supply itself that the Treasury is going to keep having to bring in to fund its initiatives,” Morgan Keegan’s Giddis said. “It’s almost counterbalanced by the favorable conditions that keep people from walking away from the Treasury market.”

The U.S. government pledged $306 billion this week in guarantees for troubled mortgages and toxic assets of Citigroup Inc. to stabilize the bank after its stock plunged 83 percent this year. Citigroup also will get a $20 billion cash injection from the Treasury, adding to the $25 billion the company received last month under the Troubled Asset Relief Program.

Non-Farm Payrolls

Futures on the Chicago Board of Trade showed 68 percent odds the Fed will lower its 1 percent target rate for overnight lending between banks by a half-percentage point at its Dec. 16 meeting, and a 32 percent probability of a three-quarter- percentage point cut.

Non-farm payrolls shed 320,000 jobs in November, compared with a drop of 240,000 jobs the previous month, according to the median forecast in a Bloomberg News survey of economists. The Labor Department is scheduled to release the report Dec. 5.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net.

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U.S. Stocks Post Biggest Weekly Gain Since 1974 as Banks Rally

By Lynn Thomasson

Nov. 29 (Bloomberg) -- U.S. stocks staged the biggest weekly rally in more than 30 years after the government agreed to protect Citigroup Inc. from more losses and automakers weighed cutting costs to win federal aid.

Citigroup doubled on the government’s plan to insure $306 billion in toxic assets owned by the bank, helping push financial companies in the Standard & Poor’s 500 Index to a record 31 percent advance. General Motors Corp. soared 71 percent as the company considered selling some U.S. brands. Ford Motor Co. jumped 88 percent.

The S&P 500 rose 12 percent to 896.24, the steepest weekly gain since 1974. The Dow Jones Industrial Average increased 782.62 points, or 9.7 percent, to 8,829.04. The Russell 2000 Index of small-cap stocks climbed 16 percent to 473.14.

“It’s refreshing to see some rationality returning to stock prices,” said Richard Weiss, chief investment officer at City National Bank in Beverly Hills, California. “The central banks and central finance authorities are doing exactly what’s needed at this point.”

Stocks advanced after the Federal Reserve stepped up efforts to unfreeze credit markets and President-elect Barack Obama picked a team of financial and economic advisers, including former Federal Reserve Chairman Paul Volcker. U.S. exchanges were closed on Nov. 27 for the Thanksgiving holiday.

Citigroup Shares Double

The gains ended a three-week slump in the S&P 500 spurred by concern the U.S. auto industry may collapse and profit reports that showed the recession intensifying. The stock benchmark is down 39 percent this year, the worst performance since 1931.

Citigroup, the second-biggest U.S. bank by assets, rose 120 percent to $8.29. A 60 percent plunge in the company’s stock price the previous week pushed regulators to stabilize the bank by injecting $20 billion and agreeing to cover losses related to its troubled assets. The government gets preferred shares and warrants equivalent to a 4.5 percent stake.

Financials in the S&P 500 climbed the past five trading sessions, the longest stretch of gains since October 2007. This week’s advance was the steepest since S&P created the industry group 19 years ago.

JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. surged more than 39 percent each.

‘Relief Rally’

“People are looking for any reason to hope and that’s why this has all the markings of a relief rally,” said Daniel McMahon, director of equity trading at Raymond James & Associates Inc. in New York. “I don’t know how sustainable it is.”

The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled 24 percent to 55.28. The index measures the cost of using options as insurance against declines in the S&P 500.

GM had the biggest gain in at least 28 years, rallying $2.18 to $5.24. The largest U.S. automaker is considering shedding its Saturn, Saab and Pontiac brands, according to people familiar with the matter. Ford increased $1.26 to $2.69.

“We envision the current Congress will authorize a short- term bridge loan that carries” GM, Ford and Chrysler LLC to the start of President-elect Obama’s administration in January, JPMorgan analyst Himanshu Patel wrote in a note dated Nov. 25.

Homebuilders Surge

Homebuilders in the S&P 500 jumped 59 percent on a new central bank plan to revive mortgage lending. The Fed pledged to buy $600 billion in debt issued or backed by government- chartered housing finance companies and said it would start a $200 billion program to support consumer and small-business loans.

D.R. Horton Inc., the largest U.S. homebuilder, rose 58 percent to $6.87 even after cutting its dividend and reporting a sixth straight quarterly loss.

Car companies and homebuilders helped lead the S&P 500 Consumer Discretionary Index to a 17 percent advance, the steepest in the history of the group.

Apple Inc. climbed 12 percent to $92.67, the most in two years. JPMorgan analysts boosted the company’s fiscal 2009 profit estimate and said sales growth for notebook computers is accelerating.

Just 17 stocks in the S&P 500 fell this week. Campbell Soup Co. posted the biggest loss, dropping 12 percent to $32.05. The world’s largest soupmaker reported sales that trailed analysts’ average estimate by 2.6 percent, according to Bloomberg data.

Employers probably slashed more jobs and manufacturing may have contracted at the fastest pace in a quarter century as the recession worsened, economists said before reports next week.

Sears Holdings Corp., Big Lots Inc. and Staples Inc. are among the S&P 500 companies scheduled to report earnings next week.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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Saudi Shares Advance on Global Bailouts; Safco, Almarai Rise

By Haris Anwar

Nov. 29 (Bloomberg) -- Saudi Arabia’s benchmark stock index rose for the first day in three, tracking global stock markets, on speculation government bailouts will stimulate the economy.

Saudi Arabian Fertilizer Co., a unit of Saudi Basic Industries Corp., climbed to the highest in more than three weeks. Al-Rajhi Bank, the country’s largest bank by market value, led gains in the financial industry, while Almarai Co., Saudi Arabia’s biggest foodmaker, rose the most in more than a month.

The Tadawul All Share Index advanced 4.1 percent to 4,604.88 at 11:17 a.m. in Riyadh, the highest in two weeks. The S&P 500 has surged more than 12 percent this week, its best weekly performance since 1974, after China cut interest rates and the Federal Reserve committed $800 billion to help resuscitate lending markets, boosting speculation government action will pull the world’s economy out of recession and boost demand.

“The Saudi market is rallying on the global optimism that the worst is probably behind us,” Abdulla al-Aqil, a trader at Samba Financial Group, said in a phone interview from Riyadh. “Stocks with a large capitalization will lead in this upward move, which I think will continue this week.”

The kingdom’s oil surplus and sovereign funds are secure and unaffected by the global financial crisis, Kuwaiti newspaper Al-Seyassah quoted King Abdullah as saying. Saudi Arabia, the world’s biggest oil exporter and de facto OPEC leader, sees $75 a barrel as a fair price for oil, the king said.

Saudi Arabian Fertilizer surged 7.8 percent to 86 riyals. The stock has climbed 19 percent during the past two sessions, to give the company a market value of about 21.875 billion riyals ($5.83 billion). Al-Rajhi Bank advanced 9.3 percent to 59 dirhams. Almarai rose 7.4 percent, the most since Oct. 28, to 127 dirhams.

The Saudi bourse is the only Arab exchange monitored by Bloomberg open on Saturdays.

To contact the reporter on this story: Haris Anwar in Dubai on Hanwar2@bloomberg.net

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Pakistan Won’t Send Intelligence Head to India, Government Says

By Farhan Sharif

Nov. 29 (Bloomberg) -- Pakistan’s government turned down India’s request to send the chief of the military intelligence agency to investigate the terrorist attacks in Mumbai.

Officials of Pakistan’s Inter-Services Intelligence, or ISI, will instead be sent to India, said Zahid Bashir, Pakistan premier’s press secretary, in a telephone interview from the capital Islamabad.

Pakistani President Asif Ali Zardari said yesterday he will send the intelligence head to India for the first time to counter claims that the attackers are linked to his country.

India will “go after” individuals and organizations behind the attacks, which were “well-planned with external linkages,” India’s Prime Minister Manmohan Singh said in a televised address Nov. 27, without identifying the nations.

At least 195 people were killed in the attacks on the Taj Mahal Palace and Tower and Oberoi-Trident hotels, a Jewish center, railway station and restaurant, said S. Jadhav, an official at the Mumbai’s disaster management unit.

To contact the reporter on this story: Farhan Sharif in Karachi at fsharif2@bloomberg.net.

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Indian Forces Comb Taj Mahal After Militants Kill 195

By Vipin Nair and Stephen Foxwell

Nov. 29 (Bloomberg) -- Indian forces combed the luxury Taj Mahal hotel in Mumbai looking for survivors of the nation’s deadliest terrorist attack in at least 15 years after commandos killed the remaining militants to end a 60-hour siege.

At least 195 people died in the attacks on the Taj Mahal Palace and Tower and Oberoi-Trident hotels, a Jewish center, railway station and restaurant, S Jadhav, an official at the city’s disaster management unit said. “We expect the number to rise as we hear there are bodies inside the Taj,” he said. Chief Minister Vilasrao Deshmukh said nine militants were killed.

The ground floor of the 565-room Taj Mahal hotel was flooded and strewn with debris after militants fought gun and grenade battles with special forces for three days. The terrorists held out because they knew the layout of the century-old heritage hotel and were well trained in the use of explosives and guns, authorities said. Indian Hotels Co. Managing Director Raymond Bickson denied a Zee News report one of the attackers had worked as a chef in the hotel.

“We have had no indications that any employees or contractual staff of the hotel have been involved as part of this terrorist attack as is being reported by some media outlets,” Bickson said in a statement.

Death Toll

More than 295 people were injured in the attacks. Most of those who died were Indians and a final death toll hasn’t been officially released. Six Americans died, U.S. Ambassador to India David Mulford said in New Delhi. More U.S. citizens are missing.

Two rabbis from New York were among five hostages and two attackers died at the Jewish Chabad-Lubavitch Center in Mumbai which was stormed by Indian commandos.

Three Germans, one Japanese, two Canadians and a Briton were killed, chief minister Deshmukh said. Two Australians died and more may have been killed, Foreign Minister Stephen Smith said earlier. Thirty-six Australians were unaccounted for, Prime Minister Kevin Rudd said late yesterday. Two French nationals died, President Nicolas Sarkozy said.

“I have told the Indian prime minister that the French security service would collaborate with all its strength to help this great democracy face this crazy, groundless, barbarian terrorism that killed many innocent people,” Sarkozy told reporters in Doha on the sidelines of a UN conference. “No cause can make this acceptable, none, ever. It’s barbarism.”

Shift in Tactics

The targeting of Westerners marks a shift in tactics for Islamic militants in India as they strike the international links that have helped the country’s economy grow at 9 percent or more for each of the past three years. Elements in Pakistan are responsible for the attacks, Prime Minister Manmohan Singh said.

One terrorist arrested on Nov. 26, the first night of the attacks, said the group had planned to blow up the Taj Mahal hotel, Times Now reported. A favorite place for weddings and business meetings, the property has accommodated the likes of Mick Jagger, Jacqueline Onassis, Yehudi Menuhin and Prince Charles, according to Tata Group’s Web site.

“Unlike any similar event of the past, it’s the fear that has affected most people in the city,” said Dr. Geeta Balakrishnan, a director at the College of Social Work in Mumbai, where about a hundred of students along with faculty members were counseling the injured. “They have exposed our vulnerability. They targeted the city’s rich and influential.”

Searching Rooms

The National Security Guard wasn’t declaring an end to the crisis until all rooms at the Taj Mahal hotel were searched, J.K. Dutt, director general of NSG commando unit, said at a briefing, adding some guests may still be in the complex. Three blasts were heard inside the hotel after the NSG said in a public announcement it would set off controlled explosions. Authorities deployed 350 of the elite NSG, Chief Minister Deshmukh said.

Television images showed commandos exchanging gunfire with one of the remaining terrorists just after daybreak before bundling his body out of a hotel window.

Busloads of commandos moved in to the Taj to do a room-by- room search after gunshots and blasts that had rocked the building in the early hours of today subsided.

The main entrances of both the Oberoi and Trident hotels were sealed with wooden planks. Glass windows of the first-floor Kandhar restaurant were peppered with bullet holes, while the 10 foot-high glass partitions in the lobby were shattered.

Twenty-four hours after the siege ended, police and Rapid Action Force personnel were planning to hand over the hotel to its management after re-checking rooms for explosives.

Trident Hotel

Suryakant Mahadik, a deputy leader of the Shiv Sena political party, which has the hotel employees union under its affiliation, said he expects the Trident hotel to open within a week. “The Oberoi will take longer,” he said.

“The terrorists tried to create unrest since there’s no other apparent motive,” Mahadik said. “About 500 employees were present at the two hotels on the fateful evening, about 10-12 employees were killed.”

The attack is the deadliest in India since bomb blasts rocked Mumbai’s commercial landmarks, including the Bombay Stock Exchange building, killing more than 250 people in 1993.

The 1993 blasts were blamed by the police on members of the Mumbai underworld, belonging to Dawood Ibrahim’s gang. India says Ibrahim is hiding in Pakistan, a charge the neighboring country denies.

A little-known Islamist group, the Deccan Mujahedeen, claimed responsibility for the shootings and explosions across the western coastal city, Indian Home Ministry official M.L. Kumawat said.

Attack Planned Six Months Ago

The attackers began planning their assaults six months ago, India’s NDTV reported, citing an account from a captured terrorist. A seized global positioning system showed some of the group left Karachi, Pakistan, as early as Nov. 12, NDTV said.

The group had reached India’s financial hub in three speedboats from Gujarat after arriving in one boat from Karachi, the Mumbai Mirror reported.

The militants broke into groups and four went to the Taj Mahal Palace and Tower Hotel while three groups of two people each went to the Oberoi-Trident hotel complex, a railroad station and a Jewish center, the report said, citing confessions made by the only terrorist arrested by the Indian authorities.

Lashkar-i-Taiba or Jaish-i-Muhammad, two Muslim extremist terrorist groups from Pakistan that have attacked India in the past, may be involved, MSNBC reported on its Web site, citing unidentified analysts and counterterrorism officials. The groups are linked to violence in Kashmir, a region over which India and Pakistan have fought.

‘Highly Motivated Terrorists’

“We came up against highly motivated terrorists,” Vice- Admiral J.S. Bedi, whose commandos led the assault against the militants, said in televised comments. He showed pictures of hand grenades, tear-gas shells and AK-47 ammunition recovered in the battle.

Multiple attacks have hit cities in India, which is mostly Hindu, with bombs planted in markets, theaters and near mosques this year, leaving more than 300 people dead.

India will “go after” individuals and organizations behind the attacks, which were “well-planned with external linkages,” Prime Minister Manmohan Singh said in a televised address, without identifying nations.

Pakistan’s government turned down India’s request to send the chief of the military intelligence agency to investigate the Mumbai terror attacks.

Officials of Pakistan’s Inter-Services Intelligence, or ISI, will instead be sent to India, Zahid Bashir, the Pakistani premier’s press secretary, said in a telephone interview from the capital Islamabad.

Zardari’s Fears

Pakistani President Asif Ali Zardari said earlier he will send the intelligence head to India for the first time to counter claims that the attackers are linked to his country.

Pakistan’s “government will cooperate with India in exposing and apprehending the culprits and the masterminds behind” the Mumbai terrorist attacks, according to a statement by the president’s office, citing Zardari’s phone conversation yesterday with Singh.

The attacks in Mumbai show a militant movement among Indian- born followers of Islam is aligning its campaign with those from majority-Muslim countries, while seeking to hit economic interests, B. Raman, the former counterterrorism director of India’s intelligence agency, said in a telephone interview yesterday.

To contact the reporters on this story: Vipin V. Nair in Mumbai at vnair12@bloomberg.net; Stephen Foxwell in Mumbai at sfoxwell@bloomberg.net.

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U.S. Offers to Help India Investigate Mumbai Terrorist Attacks

By Bibhudatta Pradhan

Nov. 29 (Bloomberg) -- The U.S. offered to assist Indian authorities in the investigation of the terrorist attacks in Mumbai that killed almost 200 people, including six U.S. citizens.

“President Bush has directed us to offer cooperation to Indian authorities,” David C. Mulford, U.S. ambassador to India told reporters in New Delhi today.

To contact the reporter on this story: Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net.



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European Stocks Post Biggest Weekly Gain Since 1987; BHP Soars

By Sarah Jones

Nov. 29 (Bloomberg) -- European stocks had their best week since January 1987, led by commodity producers and financial companies, as investors speculated efforts by governments worldwide will help shore up the economy and stabilize markets.

BHP Billiton Ltd. climbed by almost half in value after the world’s largest mining company withdrew its $66 billion hostile takeover for Rio Tinto Group on Nov. 25. Royal Dutch Shell Plc and Total SA rallied more than 10 percent as crude oil posted its first weekly advance in a month. Allianz AV and Deutsche Bank AG surged more than 30 percent, leading gains among banks and insurers.

The Dow Jones Stoxx 600 Index rallied 13 percent, the steepest weekly advance since January 1987, paring the benchmark’s drop this month to 7.1 percent. Stocks worldwide rose after China cut interest rates, the U.S. government guaranteed $306 billion of troubled Citigroup Inc. assets, and Democratic lawmakers pledged a stimulus package for the world’s largest economy.

“What we are getting is a huge collective response from policy makers,” said Mike Lenhoff, who helps oversee about $36.4 billion as chief strategist at Brewin Dolphin Securities Ltd. in London. “This has got to provide some degree of confidence.”

National benchmark indexes rose in all 18 western European markets. Germany’s DAX Index, France’s CAC 40 and the U.K.’s FTSE 100 all rallied 13 percent.

Monthly Drop

Even so, the Stoxx 600 is still down 7.1 percent in November as concern deepened that a worsening economy is stifling profits. Analysts have slashed earnings estimates this year as the credit turmoil spread. Profit for companies in the Stoxx 600 will slide 12 percent on average in 2008, compared with 11 percent growth forecast at the start of the year, according to data compiled by Bloomberg.

BHP shares soared 49 percent after the company abandoned its yearlong pursuit of Rio Tinto, blaming the rout in commodity prices and the credit-market squeeze for derailing the offer. Rio Tinto dropped 23 percent.

Shell led energy companies higher as crude oil advanced 3.1 percent to $51.46 a barrel, climbing for the first week in four.

Europe’s largest oil company jumped 19 percent, while Total, the region’s third-largest, gained 12 percent.

Allianz, Europe’s largest insurer and owner of Dresdner Bank, climbed 40 percent. Commerzbank AG, Germany’s second- biggest lender, said it will accelerate its takeover of Dresdner by as much as a year in a revised deal valued at 5.1 billion euros ($6.6 billion).

Deutsche Bank

Deutsche Bank rallied 49 percent, while Commerzbank increased 33 percent.

Irish Life & Permanent Plc, the country’s largest mortgage lender, soared 53 percent in Dublin trading after the Irish Association of Investment Managers, whose 12 members manage about 260 billion euros, proposed jointly investing with the government in the nation’s biggest banks.

Bank of Ireland Plc, the country’s biggest bank by assets, increased 15 percent, while Allied Irish Banks Plc rose 26 percent.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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Sarkozy Denies EU Is Planning to Block French Bank Rescue Plan

By Sandrine Rastello and Ladka Bauerova

Nov. 29 (Bloomberg) -- French President Nicolas Sarkozy denied that the European Commission plans to block France’s 10.5 billion-euro ($13 billion) bank rescue plan, saying the two sides are still in negotiations.

The EU is “absolutely not” blocking France’s effort to inject funds into its six main banks, Sarkozy told reporters during a visit to Doha, Qatar today. “I don’t think there is such a will from any commissioner,” he said.

The president was responding to a Financial Times report, published yesterday, which said the Brussels-based European Commission would veto France’s rescue plan unless the banks reduced lending. The French government is pushing the banks to boost loans by 3 to 4 percent in exchange for the aid.

“The world has changed,” Sarkozy said. “We must move fast” to bolster the economy, he added.

A spokesman for the European Commission said the two sides are in close contact and are seeking to reach an agreement as soon as possible.

French government officials are scheduled to meet the European Commission on Dec. 4. The two sides are “in constant contact” and will continue to fine-tune the proposal until the last moment, French Finance Ministry spokesman Bruno Silvestre said today when reached by telephone.

To contact the reporter on this story: Ladka Bauerova in Paris at lbauerova@bloomberg.net. Sandrine Rastello in Qatar at srastello@bloomberg.net.

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London Luxury-Home Values Slide for Eighth Month in November

By Simon Packard

Nov. 29 (Bloomberg) -- Luxury-home values in central London, the world’s most expensive location for prime real estate after Monaco, fell for an eighth month in November as fewer sellers held out over prices.

The estimated average value of a house or apartment in the city’s nine most expensive neighborhoods fell 3.6 percent from October, according to an index compiled by Knight Frank LLP. It was the second-largest drop since the index started in 1976. Property values declined 14 percent from a year earlier, the broker said today. The index covers homes mostly valued at more than 1 million pounds ($1.54 million).

“The last few months have seen vendors gradually accepting that prices need to be cut if a sale is to be achieved,” said Liam Bailey, Knight Frank’s head of residential research. “Further price falls are to come.”

Prime central London real estate has taken longer to register declines seen elsewhere in London because of a standoff between sellers and buyers over price. That ended in September, when the bankruptcy of Lehman Brothers Holdings Inc. caused demand to collapse from those employed in financial services, traditionally the mainstay of demand for expensive homes.

The worst banking crisis since World War I has translated into job cuts and reduced bonuses. October’s 3.9 percent monthly decline in the index set a record.

Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG and the failed investment bank Lehman Brothers are among the companies shedding staff. Job vacancies in London financial services fell 48 percent in October from a year earlier, recruitment firm Morgan McKinley said earlier this month.

Million-Pound Homes

As many as 62,000 finance-related jobs may be lost in London by the end of next year, according to the Centre for Economics & Business Research.

Least affected by the slide in values are properties worth more than 5 million pounds, which dropped 1.9 percent in value from October, Knight Frank said. Their depreciation, coupled with the British pound’s 23 percent slide against the dollar this year, may attract wealthy overseas buyers.

“Many prime properties are unique and only occasionally come up for sale,” Bailey said. For a buyer with dollars, a 15 percent property valuation drop equates to a 35 percent slide when exchange rates are taken into consideration, he said.

London and southeastern England accounted for more than three quarters of sales of million-pound homes last year, according to an index compiled from government data by HBOS Plc. Million-pound homes represented 0.6 percent of the 1.38 million U.K. property transactions last year.

Knight Frank compiles its monthly index from appraised values of properties in the Mayfair, St John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

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European Bonds Post Best Month Since 1986 as Price-Growth Slows

By Lukanyo Mnyanda

Nov. 29 (Bloomberg) -- European government bonds posted their best month in at least 22 years as a report showing inflation decelerated to the slowest pace in more than a year added to signs the region’s economic slump is deepening.

The bonds handed investors a 3.7 percent return in November, according to Merrill Lynch & Co.’s EMU Direct Government index. That’s the most since at least 1986, when Merrill started compiling the data. Ten-year bunds climbed this month as the region slipped into a recession for the first time since the euro’s debut in 1999. A European Union estimate yesterday showed the inflation rate fell by the most in almost two decades.

“Based on the economic outlook, the sentiment remains positive for bonds,” said Karsten Linowsky, a fixed-income strategist in Zurich at Credit Suisse Group AG, Switzerland’s second-largest bank. “This bullish sentiment could prevail for some time.”

The yield on the 10-year bund, Europe’s benchmark government security, fell five basis points to 3.25 percent yesterday, taking its drop in November to 65 basis points. That’s the most since February 1989, when Bloomberg started compiling the data. The 3.75 percent security due January 2019 rose 0.38, or 3.8 euros per 1,000-euro ($1,272) face amount, to 104.23.

The yield on the two-year note slipped eight basis points to 2.15 percent, leaving it 39 basis points lower this month. The yield didn’t drop for five straight months since October 2001. Yields move inversely to bond prices.

Investors should favor 10-year bunds amid speculation inflation will slow, Linowsky said. The German bund yield may drop to 3 percent and the two-year note may yield between 2 percent and 2.1 percent by March, he predicted. That’s more bullish than the median forecasts of 3.57 percent and 2.24 percent, according to analysts’ predictions compiled by Bloomberg.

Stock Losses

Bonds surged this year as the U.S. housing slump pushed up the cost of credit globally and caused stock markets to tumble, prompting central banks around the world to cut interest rates. The world’s biggest financial companies have incurred almost $1 trillion in writedowns and losses since the start of last year. The Dow Jones Euro Stoxx 50 Index, a benchmark for the euro region, dropped about 20 percent since the end of September.

Inflation in the 15-nation economy slowed to 2.1 percent this month, from 3.2 percent in October, the EU’s statistics office in Luxembourg said yesterday. The drop is the biggest since at least 1991.

Two-year yields fell to within about 12 basis points of a record low on Nov. 20 as investors bet the contracting economy will check consumer-price growth and give the European Central Bank room to lower borrowing costs next month.

Noyer’s View

The ECB wouldn’t rule out the chance of further interest- rate cuts as price pressures ease, policy maker Christian Noyer told Nikkei newspaper. Inflation in the region will stay below 2 percent throughout 2009 because of falling commodity prices and slowing growth, Noyer was cited as saying Nov. 27.

The difference in yield between German and French 10-year bonds was within three basis points of the widest since the euro’s introduction in 1999 as investors sought the safest assets. It was at 42 basis points yesterday, from 45 basis points on Nov. 24, which was the most since 1999.

Policy makers lowered their main refinancing rate by 100 basis points since Oct. 8, to 3.25 percent, and will cut it again by at least 50 basis points on Dec. 4, according to a Credit Suisse Group AG index based on overnight index-swap rates. The Frankfurt-based central bank has a 2 percent inflation ceiling.

Treasury, Gilt Returns

Bonds in the U.S. and the U.K. returned about 5 percent in November as the specter of a recession and falling stock markets pushed investors to fixed-income government debt, Merrill’s Treasury Master and gilt indexes showed.

Investors should buy U.K. inflation-protected bonds because the “unprecedented” policy response to the looming recession will revive the economy by 2010, rekindling consumer-price increases, HSBC Holdings Plc analysts said. The Bank of England cut its main interest rate by 150 basis points to 3 percent on Nov. 6 to limit the fallout from the financial crisis.

The U.K. breakeven rate, a gauge of inflation expectations as measured by the difference in yield between five-year regular bonds and index-linked debt, has been negative for more than a month, suggesting investors are betting the economic slump will lead to deflation.

The five-year French breakeven rate, considered the benchmark for Europe, was at 45 basis points today, compared with 37 basis points on Nov. 26, which was the lowest since at least 2004. The so-called breakeven rate reflects inflation rate traders expect over the life of the security.

To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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Sarkozy Denies EU Is Planning to Block French Bank Rescue Plan

By Sandrine Rastello and Ladka Bauerova

Nov. 29 (Bloomberg) -- French President Nicolas Sarkozy denied that the European Commission plans to block France’s 10.5 billion-euro ($13 billion) bank rescue plan, saying the two sides are still in negotiations.

The EU is “absolutely not” blocking France’s effort to inject funds into its six main banks, Sarkozy told reporters during a visit to Doha, Qatar today. “I don’t think there is such a will from any commissioner,” he said.

The president was responding to a Financial Times report, published yesterday, which said the Brussels-based European Commission would veto France’s rescue plan unless the banks reduced lending. The French government is pushing the banks to boost loans by 3 to 4 percent in exchange for the aid.

“The world has changed,” Sarkozy said. “We must move fast” to bolster the economy, he added.

A spokesman for the European Commission said the two sides are in close contact and are seeking to reach an agreement as soon as possible.

French government officials are scheduled to meet the European Commission on Dec. 4. The two sides are “in constant contact” and will continue to fine-tune the proposal until the last moment, French Finance Ministry spokesman Bruno Silvestre said today when reached by telephone.

To contact the reporter on this story: Ladka Bauerova in Paris at lbauerova@bloomberg.net. Sandrine Rastello in Qatar at srastello@bloomberg.net.

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European Stocks Post Biggest Weekly Gain Since 1987; BHP Soars

By Sarah Jones

Nov. 29 (Bloomberg) -- European stocks had their best week since January 1987, led by commodity producers and financial companies, as investors speculated efforts by governments worldwide will help shore up the economy and stabilize markets.

BHP Billiton Ltd. climbed by almost half in value after the world’s largest mining company withdrew its $66 billion hostile takeover for Rio Tinto Group on Nov. 25. Royal Dutch Shell Plc and Total SA rallied more than 10 percent as crude oil posted its first weekly advance in a month. Allianz AV and Deutsche Bank AG surged more than 30 percent, leading gains among banks and insurers.

The Dow Jones Stoxx 600 Index rallied 13 percent, the steepest weekly advance since January 1987, paring the benchmark’s drop this month to 7.1 percent. Stocks worldwide rose after China cut interest rates, the U.S. government guaranteed $306 billion of troubled Citigroup Inc. assets, and Democratic lawmakers pledged a stimulus package for the world’s largest economy.

“What we are getting is a huge collective response from policy makers,” said Mike Lenhoff, who helps oversee about $36.4 billion as chief strategist at Brewin Dolphin Securities Ltd. in London. “This has got to provide some degree of confidence.”

National benchmark indexes rose in all 18 western European markets. Germany’s DAX Index, France’s CAC 40 and the U.K.’s FTSE 100 all rallied 13 percent.

Monthly Drop

Even so, the Stoxx 600 is still down 7.1 percent in November as concern deepened that a worsening economy is stifling profits. Analysts have slashed earnings estimates this year as the credit turmoil spread. Profit for companies in the Stoxx 600 will slide 12 percent on average in 2008, compared with 11 percent growth forecast at the start of the year, according to data compiled by Bloomberg.

BHP shares soared 49 percent after the company abandoned its yearlong pursuit of Rio Tinto, blaming the rout in commodity prices and the credit-market squeeze for derailing the offer. Rio Tinto dropped 23 percent.

Shell led energy companies higher as crude oil advanced 3.1 percent to $51.46 a barrel, climbing for the first week in four.

Europe’s largest oil company jumped 19 percent, while Total, the region’s third-largest, gained 12 percent.

Allianz, Europe’s largest insurer and owner of Dresdner Bank, climbed 40 percent. Commerzbank AG, Germany’s second- biggest lender, said it will accelerate its takeover of Dresdner by as much as a year in a revised deal valued at 5.1 billion euros ($6.6 billion).

Deutsche Bank

Deutsche Bank rallied 49 percent, while Commerzbank increased 33 percent.

Irish Life & Permanent Plc, the country’s largest mortgage lender, soared 53 percent in Dublin trading after the Irish Association of Investment Managers, whose 12 members manage about 260 billion euros, proposed jointly investing with the government in the nation’s biggest banks.

Bank of Ireland Plc, the country’s biggest bank by assets, increased 15 percent, while Allied Irish Banks Plc rose 26 percent.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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East European Currencies: Zloty Falls; Lira Gains on IMF Talks

By Yon Pulkrabek and Ewa Krukowska

Nov. 29 (Bloomberg) -- The Polish zloty posted a fourth monthly decline against the euro after the economy grew at the slowest pace in almost three years. The Turkish lira advanced this week versus the dollar as the country moved closer to a loan agreement with the International Monetary Fund.

Polish gross domestic product rose 4.8 percent in the third quarter, the least since December 2005, compared with 5.8 percent in the previous three months. The global credit crisis is causing growth to slow across eastern Europe, reducing the allure of its assets.

“It’s definitely slowing and the moves in the currency reflect the market’s views on the region in general,” said Nigel Rendell, senior emerging-markets currency strategist at RBC Capital Markets, the investment-banking arm of Royal Bank of Canada. “I’d be a seller of the zloty.”

Poland’s currency fell 0.2 percent to 3.7681 per euro yesterday in Warsaw, paring a weekly gain to 2.5 percent. It dropped 6.2 percent this month. The zloty will decline to 3.85 per euro by the end of 2009, Rendell said.

“While the headline GDP was quite good, the speed of the decline in investment is worrying and shows our 2009 growth forecast of 3 percent might be at risk, underscoring the need for lower interest rates,” Mateusz Szczurek, chief economist at ING in Warsaw, wrote in a client note yesterday.

In other trading, the lira was at 1.5750 per dollar yesterday in Istanbul, from 1.5725 on Nov. 27. The weekly advance pared a monthly loss to 2.3 percent. Earlier yesterday, the currency rose to the highest level in more than two weeks, buoyed by speculation an agreement with the International Monetary Fund on an 18-month loan was imminent.

IMF Progress

Talks with the IMF on a new loan have made good progress and an agreement can be expected in December, the Istanbul-based Referans newspaper reported yesterday, citing unidentified officials.

Economy Minister Mehmet Simsek said Nov. 27 talks with the fund are at an “advanced stage.” The IMF is demanding “significant fiscal adjustments” from Turkey and agreement will depend on whether the country can “persuade” the fund in some areas, he said.

“An IMF stand-by program backed by a solid financing arrangement could help improve sentiment and provide support to asset prices,” Ahmet Akarli, an economist at Goldman Sachs Group Inc. in London, wrote in a research note e-mailed yesterday.

The Romanian leu strengthened 1.1 percent to 3.7898 per euro, reducing its monthly decline to about 3.2 percent, as the country prepares for parliamentary elections on Nov. 30.

Romanian Election

The Romanian Social Democrats, led by former communists, may win the most votes in the election by promising increased social benefits as the global financial crisis threatens job losses and economic stagnation, opinion polls show.

The Czech koruna fell 0.7 percent to 25.389 per euro, retreating 5.4 percent since the end of October.

Goldman Sachs lowered its economic-growth and interest-rate forecasts for Poland and the Czech Republic, citing weakening demand for their exports and tightening credit markets, according to its research note.

The Hungarian forint advanced 0.3 percent to 259.72 per euro, paring a monthly drop to 1.4 percent.

To contact the reporters on this story: Yon Pulkrabek in Prague at ypulkrabek@bloomberg.net; Ewa Krukowska in Warsaw at ekrukowska@bloomberg.net

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OPEC to Delay Production Decision to Next Month

By Maher Chmaytelli and Ayesha Daya

Nov. 29 (Bloomberg) -- OPEC members, who agree oil supply is exceeding demand, will delay a decision on whether to cut production again until next month, giving them time to assess previous attempts to halt a plunge in prices.

A meeting in Cairo today will prepare the ground for the Dec. 17 summit in Oran, Algeria, said Ali al-Naimi, oil minister of Saudi Arabia, the world’s largest exporter and de facto OPEC leader. “We will decide on a firm measure when we meet in Oran.” Asked if the producer group would seek to lower output then, he replied: “A cut is possible, we will have to see.”

Crude oil prices have slumped 62 percent from July’s record of $147.27 a barrel as the global recession cuts fuel demand. Prices continued to slide even after the Organization of Petroleum Exporting Countries, the producer of more than 40 percent of the world’s oil, decided on Oct. 24 to reduce production quotas by 1.5 million barrels from this month.

Al-Naimi said there was a “good logic” for oil at $75 a barrel, backing earlier comments from Saudi King Abdullah who told Kuwaiti newspaper Al-Seyassah that this represents a “fair price.” Crude oil for January delivery traded at $54.43 a barrel in New York yesterday.

Oil industry inventories should ideally be equal to about 52 days worth of demand, al-Naimi said. Stockpiles exceeded that level in the third quarter, reaching about 55 days of forward demand. Today’s meeting in Cairo started at 1 p.m. London time.

Bloomberg Survey

OPEC will likely lower supplies before the end of the year, according to 18 of 21 analysts surveyed by Bloomberg. Twelve predicted the reduction will be at least 1 million barrels a day, more than is pumped by Qatar.

Chakib Khelil, the group’s president who is also the oil minister of Algeria, said some supply needs to be removed from the market because members can’t find buyers for all their oil.

“Some countries are unable to sell their crude,” he told reporters in Cairo. “Crude should be taken off the market. The market is oversupplied.”

OPEC called a “consultative” meeting of ministers for today rather than wait until its next scheduled December conference in Algeria, as the slowing world economy reduced global consumption faster than expected. In September, the group urged greater compliance with existing output limits.

Earn Less

Oil producers and drillers from Exxon Mobil Corp. to BP Plc are already suffering from falling prices. OPEC’s oil export revenue will be $979 billion in 2008, 9.6 percent less than expected a month ago, because of sinking crude prices, the U.S. Energy Department forecasts.

The Cairo meeting, originally intended just for ministers from Arab nations, was expanded into a full OPEC meeting, including countries like Venezuela, Iran and Angola.

The 11 OPEC states subject to output quotas will produce 27.8 million barrels a day in November, according to Geneva- based consultant PetroLogistics Ltd., in excess of their official limit of 27.3 million barrels a day.

OPEC members have a delicate act to balance as they strive to boost prices without overreacting in terms of production cuts and being blamed for exacerbating the economic slowdown.

Demand for oil may fall for the first time since 1983 next year, Merrill Lynch & Co. said, as the U.S., Europe and Japan face their first simultaneous recession since World War II.

Eleven years ago, OPEC members bickered over quotas as oil prices slid 28 percent in 10 months amid the onset of the Asian financial crisis. At a meeting in Jakarta in November 1997, they raised quotas, even as economic turmoil in Asia was slowing demand and prices fell another 44 percent by December 1998 to a low of $10.35 in New York.

The other OPEC nations are the U.A.E., Qatar, Kuwait, Nigeria, Iraq, Indonesia, and Ecuador.

To contact the reporter on this story: Maher Chmaytelli in Cairo at mchmaytelli@bloomberg.netAyesha Daya in Cairo at adaya1@bloomberg.net

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Taiwan Semiconductor Plans to Cut Spending Amid Economic Slump

By Janet Ong

Nov. 29 (Bloomberg) -- Taiwan Semiconductor Manufacturing Co., the world’s largest custom-chip maker, plans to cut costs next year as a global economic slump crimps demand for chips used in consumer electronics.

“We are reducing costs to come out stronger from the economic downturn,” J.H. Tzeng, a spokesman for the Hsinchu, Taiwan-based chipmaker, said by phone today. “We have plans to cut costs for everything, but we haven’t made a decision yet,” he said, declining to comment if the reductions would include salary or job cuts.

The Semiconductor Industry Association expects global chip sales will drop 5.6 percent next year. STMicroelectronics NV, Europe’s largest semiconductor maker, yesterday said fourth- quarter revenue would be below the company’s forecasts because of a slowdown in orders.

Consumer electronics companies ranging from Nokia Oyj to Panasonic Corp. have slashed forecasts this month as consumers buy fewer mobile phones, flat-panel televisions and computers.

Taiwan Semiconductor, plans to cut capital expenditure in 2009, although the final budget is still being decided, Tzeng said. The company on Oct. 30 said it is considering a 20 percent cut in spending, according to Tzeng. The company will announce details at an investors briefing to be held at the end of January, he said.

The chipmaker, which employs about 23,000 people, has also imposed a hiring freeze, and would consider hiring only if there are special needs, Tzeng said.

Unpaid Leave

Smaller rival United Microelectronics Corp may ask workers to take unpaid leave in 2009 to cut costs, the Economic Daily News reported today, citing unidentified company executives. The firm has already trimmed its workforce so it doesn’t plan to cut wages or ask staff to take unpaid leave this year, the Chinese- language newspaper said. Alex Hinnawi, a spokesman at United Microelectronics declined to comment on the report.

Taiwan’s jobless rate rose to its highest in more than three years in October after the economy contracted. Taiwan’s economy will follow Asian neighbors Japan, Singapore and Hong Kong into a recession this quarter after shrinking in the three months through September, the government aid on Nov. 20.

To contact the reporter on this story: Janet Ong in Taipei at jong3@bloomberg.net

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Rand Logs Biggest Weekly Gain in a Month as Stock Markets Rally

By Garth Theunissen

Nov. 29 (Bloomberg) -- South Africa’s rand posted its biggest weekly gain against the dollar in a month as stocks rallied around the world on speculation government efforts to shore up the economy may avert the worst of the credit crunch.

The rand gained with higher-yielding assets as the U.S., Europe and China this week announced financing plans worth a combined $1 trillion to prevent a global recession. It strengthened after the nation’s stock market logged its first five-day advance this month as record inflation in Africa’s biggest economy eased.

“Global factors are still the dominant factor for the rand,” said Ulrich Leuchtmann, head of foreign-exchange research in Frankfurt at Commerzbank AG, Germany’s second-biggest lender. “The rand is highly correlated with global risk sentiment, which has abated from extremely high levels partly due to measures aimed at stabilizing the global banking crisis.”

The rand advanced 3.8 percent this past week to 10.0800 per dollar by 5:30 p.m. in Johannesburg yesterday. It climbed 3.4 percent to 12.8007 per euro. In the month it fell 2.8 percent versus the dollar and 2.7 percent against the euro.

South Africa’s benchmark FTSE/JSE Africa All Share Index of stocks rallied more than 17 percent in the past week, the biggest five-day increase since 1995 and the first this month. Europe’s Dow Jones Stoxx 600 Index climbed 12 percent in the week.

Economic Packages

The rand strengthened with emerging-market currencies including the Brazilian real and the Turkish lira after China’s central bank cut interest rates by the most in 11 years on Nov. 16, three weeks after the government announced a $586 billion plan to boost growth in the world’s fourth-biggest economy.

The Federal Reserve also committed $800 billion to unfreeze credit markets and arranged a $306 billion government rescue of Citigroup Inc., while the European Union proposed a 200 billion- euro ($258 billion) spending package.

The rand also gained after inflation slowed for a second month in October, boosting speculation the South African Reserve Bank may cut its main interest rate from 12 percent, the highest level in more than five years, on Dec. 11.

Consumer-price growth eased to 12.4 percent from 13 percent in September, Pretoria-based Statistics South Africa said on Nov. 26. Producer-price inflation slowed to 14.5 percent in October, the weakest pace in six months, the national statistics body said Nov. 27.

Government bonds were mixed. The yield on the benchmark 13.5 percent security due September 2015 rose four basis points in the week to 8.30 percent. The yield on the 13 percent note maturing in August 2010, which is more sensitive to interest-rate expectations, slipped 14 basis points to 8.28 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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Hu: stable, fast growth tops economic agenda

Updated: 2008-11-29

(Xinhua) BEIJING - Chinese President Hu Jintao said Friday the top priority of the country's 2009 agenda on economic development is to maintain a "stable and relatively fast growth", amid the grim global economic downturn.

"We will ensure a quality and fast growth of the national economy next year," Hu said while sitting down with personages outside the ruling Communist Party of China (CPC) to seek their advice on the country's economic development.
He said the country would pursue an "all-rounded and sustainable" growth that stresses both quality and efficiency.

The world's fastest growing economy saw its growth slow sharply to nine percent year on year in the third quarter, the slowest pace in five years, as a result of slower export and investment growth.

The president said the country would continue to practice "active" fiscal and "moderately loose" monetary policies next year, and would in the meantime strengthen and improve macro controls according to changing conditions.

Such proactive policies is a transition made earlier this month against adverse global economic conditions from the earlier "prudent" fiscal and "tight" monetary policies aimed at curbing inflation and averting overheating.

He stressed the importance of boosting domestic demands, saying the country would bring consumption to play a bigger role in driving the economic growth, and the expansion of consumer spending would receive more prominent emphasis.

China would also increase its investment in rural areas, agriculture, and farmers "by a large extent" to guarantee the development of the agricultural sector and ensure the output of grain and other farm produce, according to the president.

Hu said the country would continue to promote economic restructuring. China has been working to reduce its heavy reliance on exports and investment over the past years.

"The country needs to take the challenges of the ongoing global financial crisis as opportunities to accelerate industrial restructuring to create new growth and foster other competitive edges," he said.

China would continue with its reform and opening up, Hu said. "The country will lose no chance to introduce reforms that can promote the development at the right time, and will take note of bringing the market into full play in allocating resources."

The country would actively develop the export-oriented sector and step up the diversification of exporting markets, Hu added.

He also said the country would stick to improving people's living conditions and building a stable society. The country would adopt "more active" employment polices next year, Hu said.

He pledged to improve urban and rural social security systems and vowed intensified efforts in supervision and inspection of food, drug and work safety.

"The country has great potential in economic development and has also accumulated strong capabilities to withstand risks over the past 30 years of reform and opening up," Hu told the non-Communist people.

The non-CPC personages said they endorsed the CPC and government's judgement on current situation as well as plans on next year's economic development. They also offered suggestions on economic issues such as the fight against the financial turmoil, and macro control measures.


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Pound Posts Biggest Weekly Gain Versus Dollar in Almost 3 Years

By Anchalee Worrachate

Nov. 29 (Bloomberg) -- The pound had its biggest weekly advance against the dollar in almost three years as a rebound in stocks rekindled appetite for higher-yielding currencies.

The U.K. currency also rose for a second straight week against the euro as the FTSE 100 Index advanced the most this week in nearly a month. The pound lost 3.4 percent against the dollar and 3.5 percent against the euro in November on speculation that a recession in Britain will deepen, forcing the Bank of England to cut interest rates at a faster pace than the Federal Reserve and European Central Bank.

“The rebound in equity markets provided some support for sterling in the near term and I wouldn’t rule out it pressing higher in coming days,” said Ian Stannard, a foreign-exchange strategist at BNP Paribas SA in London. “Longer term though, I still believe sterling is vulnerable. We expect its recent rally to run out of steam in the middle of next week. The economic outlook will continue to weigh on the currency.”

The pound dropped to $1.5333 yesterday in London, from $1.5406 on Nov. 27. It rose 2.6 percent in the past week, the most since Jan. 6, 2006. The currency strengthened 1.9 percent from the previous week to 82.83 pence per euro. The pound will fall to $1.41 by year-end, BNP Paribas said.

The pound has a correlation of 0.72 with the MSCI World Index in the past 12 months, according to Bloomberg data. A value of 1 would mean the two move in lockstep.

The seizure in credit markets and an approaching recession sapped consumer demand in Europe’s second-largest economy, prompting the Bank of England to cut its key interest rate four times this year from 5.50 percent. Policy makers this month reduced the key interest rate by 150 basis points to 3 percent, the lowest since 1955. The pound dropped 4.5 percent against both the dollar and 4.3 percent versus the euro in November.

Gilts Rise

U.K. gilts rose yesterday as investors sought the relative safety of government bonds, with two-year notes snapping four days of losses.

The gains pushed the yield 15 basis points lower to 2.19 percent. The 4.75 percent due June 2010 climbed 0.21, or 2.1 pounds per 1,000-pound ($1,536) face amount, to 103.81. The yield on the 10-year note dropped one basis point to 3.77 percent. The yield dropped 11 basis points this week. Yields move inversely to bond prices.

The “big issue” for the British economy is to get banks to lend again, Timothy Besley, a member of the Bank of England’s Monetary Policy Committee, said Nov. 27. The central bank’s next interest-rate decision is due Dec. 4.

Policy makers will cut the main interest rate at least another 75 basis points to 2.25 percent next week, according to a Credit Suisse Group AG index of probability based on overnight index-swap rates.

Gilts Versus Bunds

“If that’s the market consensus, then the two-year yield at the current level is a steal,” said Jason Simpson, a fixed- income strategist at Royal Bank of Scotland Group Plc in London. “The market is expecting aggressive rate cuts ahead and that should support the front end of the market.”

Gilts beat their European counterparts this past month, handing investors a 5 percent return, compared with a gain of 3.8 percent on German bonds, according to Merrill Lynch & Co. U.K. Gilts and German Federal Governments indexes.

The looming recession in the U.K. caused investors to raise bets on deflation in the past month. The five-year breakeven rate, a gauge of inflation expectations as measured by the difference in yield between regular bonds and index-linked debt, was minus 91 basis points yesterday, compared with a positive 105 basis points at the start of November.

The economic pessimism is “overdone,” leaving the securities at “attractive levels,” Steve Major, HSBC Holdings Plc’s head of fixed-income strategy in London, wrote in a note to clients received by e-mail Nov. 27. “At some stage, the market will look beyond the deflation discounted for 2009 and to the risks of rising inflation by 2010-11.”

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

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Lehman’s Neuberger Division Sale May Be Scuttled By S&P Drop

By Christopher Scinta

Nov. 29 (Bloomberg) -- Lehman Brothers Holdings Inc. may not get to close a $2.15 billion sale of its investment- management business to Bain Capital LLC and Hellman & Friedman LLC as a result of a provision tying the deal’s completion to the value of the Standard & Poor’s 500 Index.

The purchase by Bain and Hellman of the division, which includes the Neuberger Berman unit, is conditioned on an S&P 500 average closing price of more than 902 for the 10 trading days before the sale closes. The average for the last 10 days has been about 844, after the index reached its 52-week intraday low of 741.02 on Nov. 21. When the parties signed the deal Oct. 3, the S&P closed at 1099.23.

“The buyer gets the comfort of knowing that a certain market decline does create an out on the deal that is clean,” said Owen Pell, a commercial and securities litigation lawyer at White & Case, about tying the deal to the market. He isn’t involved in the Lehman transaction.

By setting a floor for the S&P 500’s value as a closing condition, rather than relying on the material adverse event clause in the agreement, the buyers may avoid potentially difficult and expensive litigation, Pell said. The buyers may also choose to waive the condition.

Carlyle Group, the second-largest private-equity firm, said in court papers that Bain and Hellman may get Lehman’s investment management business for as little as $900 million.

Another Bidder

Another bidder may top the Bain-Hellman offer by Dec. 1, spurring a court-supervised auction Dec. 3. Carlyle has said it is interested in bidding on the Lehman business and is working with former Neuberger executive Jeffrey Lane. Sales of assets in bankruptcy are often subject to higher offers.

Bain Capital spokesman Alex Stanton and Hellman spokesman Pen Pendleton declined to comment. Carlyle lawyer Philip Mindlin of Wachtell Lipton Rosen & Katz didn’t return a call for comment.

A hearing before U.S. Bankruptcy Judge James Peck in New York to approve a sale to the winning bidder is set for Dec. 22. The deal may close shortly thereafter.

A worst case scenario for Lehman would be if there were no other bids, the S&P 500 wouldn’t reach the closing average required in the Bain and Hellman offer and the private equity firms would choose not to waive the condition and walk away.

Fourth-Largest

Lehman was the fourth-largest investment bank before it filed the biggest bankruptcy in history Sept. 15 with $613 billion in debt. Peck approved New York-based Lehman’s plan to auction its investment management business in October. His approval came only after the bank reduced the breakup fee and expense reimbursement to be paid to Bain and Hellman if they are outbid, making it easier for rivals to submit bids.

The breakup fee was cut to $52.5 million from $70 million. The lead bidders must now document any expenses they seek to have reimbursed. Previously, the bidders were allowed as much as $35 million for expenses without itemizing them, according to court filings.

Competing bidders may submit offers that exceed that of Bain and Hellman by only $25 million, rather than the $50 million overbid originally proposed. The modified rules don’t prohibit joint bids and management buyouts.

Lehman bought Neuberger Berman in 2003 for $3.2 billion to expand its wealth-management business and later consolidated its asset-management operations into a single division.

Bain and Hellman agreed Sept. 29 to buy most of the asset- management business from bankrupt Lehman for $2.15 billion, minus $400 million for executive bonuses.

Peck said he was hopeful the looser rules would encourage other bidders, though he added, “this transaction appears to be a private sale masquerading as a public one.”

The case is In re Lehman Brothers Holdings Inc., 08-13555, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Christopher Scinta in New York bankruptcy court at cscinta@bloomberg.net.

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