UK gilts slide as ECB stimulus talk weighs

LONDON: Gilts fell heavily on Friday on speculation about stimulus moves by the European Central Bank, but safe-haven German debt fell even more, pushing the 10-year British/German debt yield premium to its lowest in over a month.

Ten-year gilt yields rose 5 basis points on the day to 1.53 percent, but their spread over Bunds tightened by more than 2 basis points from late on Thursday to below 14 basis points, and at one point was as low as 12.4 basis points.

In the futures market, the September gilt settled 54 ticks down on the day at 121.18, compared to an 80-tick decline on the equivalent Bund contract.

ECB President Mario Draghi said on Thursday that the central bank stood ready to do whatever it took, within its mandate, to preserve the euro.

Markets interpreted this as raising the prospect of more ECB purchases of peripheral debt, diminishing the appeal of Bunds -- though Germany's central bank said it was not keen on the idea.

Ratings agency Moody's recent downgrade to its outlook for Germany's debt and a dearth of British issuance over the next three weeks also leant gilts more appeal.

Gilts and Bunds extended losses further on Friday after German Chancellor Angela Merkel and French President Francois Hollande said key decisions from last month's EU summit should be implemented quickly.

"I think they really add political weight to what Draghi had to say yesterday," said Eric Wand, a gilts strategist at Lloyds. "Were the ECB not to deliver, the market would really unleash its displeasure," he added.

For next week, strategists expect increasingly choppy conditions. There will be a steady flow of data, speculation about ECB bond purchases and Bank of England and Federal Reserve policy meetings, amid low liquidity as many London-based investors take a holiday while the city hosts the Olympic Games.

The BoE is not expected to change its four-month, 50 billion pound gilt purchase programme after its Aug. 1-2 policy meeting. But strategists will take a close look at July purchasing managers' data released in the run-up to gauge whether the economy will recover sufficiently in the third quarter to dissuade the BoE from extending asset purchases in November.