LONDON: British government bond prices recovered from heavy losses early on Thursday after the European Central Bank said it would pump hundreds of billions of euros into the sagging euro zone economy.
After outperforming strongly on Wednesday, when two Bank of England policymakers dropped their calls for higher interest rates, gilt prices opened sharply lower on Thursday, pushing 10-year gilt yields up nearly 9 basis points to their highest in more than a week.
But when ECB President Mario Draghi said the bank would pump 60 billion euros a month into the euro zone economy by purchasing mostly government bonds, gilts tracked Bunds higher and prices briefly turned positive on the day before faltering.
At 1630 GMT, 10-year gilt yields were up 1 basis point at 1.52 percent after the biggest intra-day swing in over a month. "Gilts have had a funny old day," said Citi fixed income strategist Jamie Searle.
"The absolute level of gilt yields is being driven by Bunds, albeit gilts are clearly lagging in the rally given that the market is focused on euro zone bond buying," he said.
The yield premium that 10-year gilts offer over Bunds widened by as much as 10 basis points on Thursday to 106 basis points as gilts gave back the gains they had made on Wednesday after the BoE published its January policy minutes.
Searle said Bunds had been lifted by the scale of the planned ECB bond buying, which was slightly larger than the market had expected, and the fact that Draghi said the purchases would continue until inflation showed signs of picking up.
Searle also pointed to the continued outperformance of five-year gilts relative to longer maturities, as British investors continued to favour shorter maturities in the wake of the BoE's renewed unanimity over keeping interest rates low.
The UK Debt Management Office is scheduled to sell several billion pounds of 40-year index-linked gilts via a syndication next week.
Although long-dated gilts underperformed on Thursday, some analysts said the ECB decision could ultimately boost the sector, in which many British funds are required to invest to give them a safe stream of income to pay pensions.
"Despite interest rates in the UK being at historical lows, there is still the possibility that they may drop further, causing more problems for pension funds relying on assets other than government bonds to bridge their deficit gap," said Danny Vassiliades, a consultant at actuaries Punter Southall.
Comments
Comments are closed.