LONDON: British government bond futures closed at a two-week low on Thursday, after the European Central Bank agreed on a plan to try to hold down the borrowing costs of troubled euro economies.
December gilt futures settled 74 ticks down on the day at 120.28, their lowest close since Aug. 23, after the ECB agreed on a new and potentially unlimited bond-buying programme.
ECB support for peripheral debt reduces the attraction to investors of safe-haven debt such as gilts and Bunds, which suffered even more, with the December Bund future dropping 123 ticks on the day.
"The superficial reaction to the ECB has precipitated an unwind of 'flight to safety' positions. My concern is not to overinterpret that," said Monument Securities strategist Marc Ostwald, warning that sentiment could easily reverse, as it did after last month's ECB meeting.
The ECB purchases are not a completely done deal, as Germany's constitutional court has to rule on their legality, and they hinge on governments agreeing to strict conditions, potentially monitored by the International Monetary Fund.
Ten-year gilt yields rose 7 basis points on the day to 1.72 percent, but gilts' spread over Bunds tightened 6 basis points on the day to 15 basis points as British debt outperformed German bonds.
While Bunds will not benefit from ECB purchases, the Bank of England's September Monetary Policy Committee meeting confirmed on Thursday that it would carry on the four-month, 50 billion pound programme of gilt purchases that it started in July.
Friday brings major British and US economic data, including industrial production and producer price figures at 0830 GMT, and US non-farm payrolls at 1230 GMT.
"People are still very concerned about what's going on in the UK," said Ostwald. "There are a lot of people who have gone into sterling assets and if they start to unwind their 'flight to safety' positions, then gilts are more than likely to underperform," he added.
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