Ten-year gilt underperform, yields hit 4-month high

LONDON: Ten-year gilt yields touched a new four-month high on Monday, again underperforming versus German government debt due to concerns over Britain's high level of indebtedness against a backdrop of broadly improved appetite for risk from investors.

Gilts and Bunds tumbled on Friday as markets digested the US Federal Reserve's promise of more stimulus for the economy, with gilt yields hitting their highest since early May. Prices extended those losses slightly on Monday.

The Fed's move both boosted European stock markets at the expense of government debt and also hurt debt investors' appetite for British debt by promising to buy more US debt securities.

 That all came on top of bold moves by the European Central Bank which have offered the first hope in months that the euro zone's debt crisis may be easing, drawing money back into mainland Europe to which gilts had been one alternative.

 In Britain itself, there are worries that weak growth will force Britain to borrow more than the 164.4 billion pounds ($267.1 billion) planned for the current fiscal year.

"Many of the major event risks flagged to occur in September have come and gone, removing another set of tail risks. We view developments positively, and, although event risk has not been eliminated completely, should support a modest risk on environment," strategists at Deutsche Bank wrote in a note to clients.

"This also leaves more room to focus on domestic affairs where ... fiscal slippage is starting to receive some attention," they added, estimating that Britain may potentially need to borrow an 10-33 billion pounds during the current fiscal year.

 Ten-year gilt yields touched a four-month high of 1.987 percent at 0713 GMT, and at 0745 GMT were 1 basis point higher on the day at 1.98 percent. Their spread over Bunds was 2 basis points wider at 28 basis points, testing recent highs.

In the futures market, the December gilt contract was 19 ticks down on the day at 117.83, in contrast to an 11-tick rise in the December Bund future.

While there is little British domestic news scheduled for Monday, the rest of the week brings a slew of British economic releases. Inflation data comes on Tuesday, followed by retail sales and public borrowing figures and minutes from the Bank of England's last policy meeting.

 The Debt Management Office will also sell 4.5 billion pounds of 1 percent 2017 gilts via auction on Thursday, and the Bank of England continues its 3 billion pounds of gilt purchases a week under its quantitative easing programme.