Cameron austerity makes UK debts world beater

London: British companies are beating the world in the bond market as investors bet Prime Minister David Cameron's efforts to tame the budget deficit will preserve the UK's top credit rating.

UK corporate debt denominated in all currencies returned 3.25 per cent last month, the most in a year and the best among the 10 countries making up almost 90 per cent of the $6.2 trillion (Dh22 trillion) Bank of America Merrill Lynch Global Broad Market Corporate Index.

Bonds of Banco Santander's Abbey National unit and Tesco, the nation's largest supermarket chain, led the gains, returning as much as 12.7 per cent.

Cameron's coalition government is pushing cuts and austerity measures worth £30 billion (Dh169 billion) a year to shrink the UK's 11 per cent deficit to 2.1 per cent by 2015.

Credit rating

Investors are speculating this will preserve Britain's AAA credit rating without slowing the economy too much that it curbs the ability of companies to meet their debt payments.

"Investors are happy with the measures taken by Cameron," said Christian Weber, a senior credit strategist at UniCredit in Munich.

"The perception has spread that it's better to actually tackle budget deficits than just keep spending and spending and spending, because that limits your ability in the future to help your economy stabilise."

The extra yield investors demand to hold UK corporate bonds instead of benchmark government securities narrowed 4 basis points to 237 basis points in August, or 2.37 percentage points, compared with an increase of 6 basis points for US company debt, according to Bank of America Merrill Lynch's global index. Spreads widened an average 4 basis points across all countries in the index last month and were unchanged on Thursday at 180 basis points. Yields averaged 3.558 per cent.

Government bonds

UK government bonds are also rallying. They returned 4.7 per cent last month, second only to Denmark's 4.75 per cent, according to the Bank of America Merrill Lynch Global Sovereign Broad Market Plus index.

Elsewhere in credit markets, the cost of protecting corporate bonds from default in the US fell to the lowest level in more than two weeks after the government said jobless claims fell.

The measure fell after initial jobless claims declined by 6,000 to 472,000 in the week ended August 28, in line with the median forecast of economists surveyed by Bloomberg News, Labour Department figures showed on Thursday in Washington.

Yesterday's August payrolls report may show the economy lost 105,000 jobs, the third straight monthly decline, according to the Bloomberg survey median.