Gilts slide as shares rise, euro zone woes support

LONDON: Gilts stayed firmly in negative territory for most of the session on Wednesday as stocks bounced, but analysts said lingering concerns over the euro zone debt crisis limited losses for the British debt contracts.

The pan-European FTSEurofirst 300 index of top shares provisionally closed up 3 percent at 930.69 points after hitting a two-year closing low in the previous session.

The December gilt future settled 42 ticks down at 129.03, outperforming the equivalent Bund by 44 ticks.

"The lion's share of the outperformance is down to what's happening in Europe and particularly in Germany," said Eric Wand, strategist at Lloyds.

Germany's top court handed the country's parliament a greater say over euro zone bailouts earlier on Wednesday, in a closely-watched ruling that could hamper Berlin's ability to act swiftly to counter a debt crisis that has plagued the currency bloc for two years .

Analysts say that concerns German taxpayers will have to keep footing the bill for the fiscal laxity of their peers in the single currency zone have helped burnish the appeal of gilts as a safe-haven asset.

The euro zone crisis will help maintain this appeal in the near term, Wand said.

"There will be people willing to put money back into the (gilt) market until Europe is sorted out, which it shows no sign of."

Analysts said softer-than-expected industrial output data in Britain added to the supportive backdrop for gilts and reinforced speculation the Bank of England may eventually have to restart its asset-purchase programme to shore up the ailing economic recovery .

"The data added to the backdrop that macro data has painted of late: that things are softening in the UK," Wand said.

The BoE is widely expected to leave interest rates on hold at 0.5 percent when it announces its decision on Thursday.

There has been growing speculation in markets that a sharply deteriorating global economic backdrop and a weak performance at home will encourage the central bank to inject more stimulus later this year.

Economists polled by Reuters last week put the odds of any future QE -- not only in September -- at just 35 percent, although this is up from 30 percent in early August, after two officials abandoned their call for a rate rise .

In the cash market, the yield on 10-year gilts was almost 5 basis points up at 2.34 percent, tightening the spread against Bunds by around a basis point to 44 basis points.

* Dec gilt 129.03 (-0.42)

* Sept short sterling 99.08 (+0.01)

* Dec short sterling 99.00 (+0.03)

* 10-year yield 2.34 percent (+5 bps)

Copyright Reuters, 2011