All the Way to Reno: UK Gilts Outdo German Bunds

Humming...all the way to Reno
You've dusted the non-believers
And challenged the laws of chance
Now, sweet--you're so sugar sweet
You may as well have had 'kick me'
Fastened on your sleeve

Reno, Nevada of R.E.M. song fame is a popular gambling destination for Northern California residents alike some of my relatives in the Bay Area. While nowhere near as large a gambling mecca as Las Vegas, its location near the California-Nevada border makes it more accessible to Californians fancying a game of chance on a day or overnight trip. Reno further bills itself as "The Biggest Little City in the World."

In more ways than one, the United Kingdom too is a comparatively small gambling destination dwarfed by the continental EU economies. Despite its reluctance to become thoroughly intermeshed with regional integration and its attendant regulatory pressures--especially by not joining the eurozone--the UK has obtained significant benefits nonetheless from being adjacent to the eurozone. Given its status as a more liberal financial centre that facilitates 'casino capitalism,' the City of London has benefited more than 'real' EMU nations from expanded trade in euro-denominated bonds and euro currency. It seems that such 'close distancing' is reaping particular advantages at the present time. To be honest, the UK is currently in a mess. Student protests in addition to widespread worker protests, next-to-no growth and what else have you, people are unhappy when there's no money to go around.

But, on the bright side, the moribund UK economy's sovereign debt is now outperforming its German equivalent by non-implication in the EMU debt crisis. That is, over a decade, the UK's borrowing costs are now lower than Germany's. Go figure; a recent German failed auction where bidders for 10-year bunds were few and far between certainly didn't improve confidence. From Investment Week:

Germany will have to take its share of the pain caused by the crisis in Europe, which will cause yields on its debt to climb. "In the medium term there has to be burden sharing in Europe, and Germany has to play its part in that," [bond fund manager Stephen Snowden] said. Snowden said as bund yields rise, it will leave the UK looking more and more like one of the few real safe havens. "For me it all reaffirms gilts' status as a safe haven."

His comments came ahead of a shock climb in bunds seen today, with yields jumping above 2% for the first time in weeks after a disastrous debt auction. Germany said the bid-to-cover ratio was only 0.65 times [!], with the German debt agency selling just €3.644bn of its new 10-year bund, well under the €6bn targeted. Yields on the country's 10-year bonds have climbed to 2.06%, well above last Friday's level of 1.89%.

Snowden said while bund yields looked set to continue to rise over the medium term, gilts have a lot of support at these levels. "Gilts are well supported at these levels and I certainly do not see an imminent collapse. "You would not want to be shorting gilts now as the Bank will continue to buy them and international investors will look to them more and more as one of the few safe havens left."

Perhaps the UK really has written its own directions and whistled the rules of change in terms of the EU pecking order despite everything.

UPDATE: Bloomberg suggests Japanese investors shunning bunds and moving into gilts helps explain these market movements.