Gilts lower after Greek deal

LONDON: Gilts edged down early on Wednesday, pressured by cautious optimism after the Greek bailout deal on Tuesday, with investors looking to see if the latest Bank of England monetary policy committee minutes keep open the possibility of more stimulus.

The complex Greek deal buys time to stabilise the 17-nation currency bloc and strengthen its financial firewalls, but it leaves deep doubts about Greece's ability to recover and avoid default in the longer term.

At 0850 GMT the March gilt future was 16 ticks down at 114.80, while the equivalent Bund was 4 ticks lower.

"In the short-term the current modest risk-on sentiment will remain present in the market on the back of the second LTRO (liquidity provision operation) taking place next Wednesday and the continued - mostly successful - steps on the Greek front," Lloyds fixed-income strategists wrote in a note.

The BoE will release minutes of its Feb. 8-9 Monetary Policy Committee meeting at 0930 GMT, which economists will scrutinise for clues as to whether MPC members might be minded to expand quantitative easing further in the coming months.

February's decision to authorise another three months of QE purchases was not a surprise, but analysts are much more divided about whether there will be further QE in May.

Barclays Capital economists said they would pay particular attention to the language used by those policymakers who supported the latest 50 billion pound extension.

"The more equivocal they were about the need for the additional stimulus, the less likely it is that QE will be further extended in May," they said.

Meanwhile, BoE deputy governor Charles Bean said after market close on Tuesday that Britain's economy looked set for a moderate recovery starting later this year as falling inflation eased the squeeze on household incomes.

"It is clear from Mr Bean's comments that he supported this month's QE expansion," the economists at Barclays Capital said.

"However, he did not give an indication as to whether he believes the current degree of stimulus is sufficient or whether he would be inclined towards a further increase in asset purchases.

"We view Mr Bean as a key marginal voter and, as such, suspect he does not have a strong inclination either to extend or to halt QE, making his next decision heavily data-dependent."

In the cash market, the yield on 10-year gilts was 1 basis point higher at 2.23 percent, with the spread against Bunds widening by around 1 basis point to almost 25 basis points.