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March 29 (Bloomberg) -- Britain?s government bonds and pound rose after a poll showed the opposition Conservative Party increased its lead amongst voters and Standard & Poor?s affirmed the U.K.?s top credit rating.
The advance in gilts pushed the yield on the 10-year bond down the most in more than a month as S&P said it won?t review the U.K.?s rating until after parliamentary elections that must be held by June 3. A wider lead for the Conservatives makes it less likely the forthcoming election will produce a government without a parliamentary majority, and increases the chances that cuts will be made to stem the fiscal deficit.
?The Tory lead in the polls seems to have reversed some of the decline we?ve seen in recent weeks, which is helping gilts,? said Jason Simpson, an interest-rate strategist at Royal Bank of Scotland Group Plc in London. S&P?s affirmation ?wasn?t a big surprise, but is nice to know,? he said.
The yield on the 10-year gilt fell 6 basis points to 3.98 percent as of 4:59 p.m. in London. It earlier fell as much as 8 basis points for the biggest drop since Feb. 24 based on generic yield data compiled by Bloomberg. The 3.75 percent security due September 2019 advanced 0.43, or 4.3 pounds per 1,000-pound ($1,499) face amount, to 98.22. The two-year gilt yield dropped 1 basis point, to 1.17 percent.
The pound rose to $1.4969 from $1.48978 at the end of last week. It appreciated to 138.7 yen from 137.82 yen. Against the euro, the British currency was little changed at 89.96 pence.
Dollar Correlation
The pound strengthened versus the yen as the MSCI World Index of shares advanced 0.3 percent, stoking demand for riskier assets denominated in the British currency. The gains came even as Bank of England data showed U.K. mortgage approvals unexpectedly fell to a nine-month low.
The pound rose against the dollar 47 percent of the time in the last 120 days when the MSCI World Index advanced, according to data compiled by Bloomberg.
?Equities are trading higher this morning and that?s helping the pound against the dollar,? said Jeremy Stretch, a senior currency strategist at Rabobank International in London. ?Markets need to see that the Conservative lead is going to result in an election win before they are more reassured.?
Concern that an election will fail to produce a government strong enough to tame the deficit has helped drive the pound lower this year against all 16 of its most-traded peers. Sterling has lost 7.3 percent versus the dollar and 1.2 percent against the euro in 2010.
Spending Plans
The Conservatives? lead over Prime Minister Gordon Brown?s Labour Party widened by 2 percentage points from last week, the ICM poll for the News of the World newspaper showed yesterday. The Conservatives have 39 percent of support compared with Labour?s 31 percent, the newspaper said. A YouGov Plc poll for the Sunday Times newspaper showed the Conservatives ahead by 37 percent to 32 percent.
George Osborne, Treasury spokesman for the U.K. Conservatives, said his party would cut spending by 6 billion pounds immediately to trim a record deficit and cancel part of a proposed employment-tax increase.
Osborne faces Chancellor of the Exchequer Alistair Darling tonight in the first televised debate of the campaign for this year?s election, which is likely to fall on May 6. Brown has yet to call the vote. Brown on March 26 gave Darling his backing to keep his job should the Labour Party win.
S&P kept the U.K.?s credit rating on negative outlook, meaning that it is more likely to be downgraded than upgraded or kept the same.
?Consolidation Plan?
?In the absence of a strong fiscal consolidation plan, the U.K.?s net general government debt burden may approach a level incompatible with a AAA rating,? S&P analysts including Trevor Cullinan wrote in a statement published in London today. ?We expect to review the long-term rating and outlook again once medium-term fiscal policy becomes clearer following the 2010 parliamentary elections.?
S&P first lowered its outlook on Britain in May and said the nation faced a one in three chance of losing its top rating, which it has held since 1978. Darling said in his budget report on March 24 that he expects the deficit to decline from 11.8 percent of GDP to 4 percent by April 2015.
U.K. gilts returned 0.4 percent this year, compared with 0.9 percent for U.S. Treasuries and 2.3 percent for German government bonds, according to indexes compiled by Bank of America Corp.?s Merrill Lynch unit.
http://www.bloomberg.com/apps/news?pid=20601083&sid=ahSiAGPD1ENI
Turns out that overseas investors and credit rating agencies don't like the socialist governments of Europe anymore.