LONDON: British government bonds recovered on Tuesday from multi-month lows touched in the previous session, with the sell-off looking even more excessive in the light of healthy demand for a new super-long gilt sold via syndication.
On Monday, 10-year gilt yields reached their highest in 20 months and interest rate futures plunged, in a panic reaction to recent comments by the US Federal Reserve that it planned to reduce monetary stimulus later this year.
At 1117 GMT on Tuesday, the yields were 5 basis points lower on the day at 2.487 percent, off the 20-month high of 2.597 percent. September gilt futures were 81 ticks higher on the day at 111.45, reversing Monday's underperformance versus Bunds.
The yield differential between 10-year gilts and Bunds narrowed by 5 basis points to 70 basis points. On Monday, it reached 76 basis points - the widest level since July 2010.
"Rates sold off much more quickly in the UK than they did in Europe... You'd expect gilts to outperform in a rally," said Shahid Ladha, gilt strategist at BNP Paribas.
He added that the successful syndicated sale of the longest-ever gilt this session showed that demand for British debt remained high despite the sharp price moves of recent weeks.
Britain was set to sell 5 billion pounds ($7.7 billion) of the 3.5 percent 2068 gilt after attracting orders exceeding 12 billion pounds, a bookrunner for the deal said.
Before the process started, analysts expected up to 4 billion pounds of the gilt to be sold. Marc Ostwald, strategist at Monument Securities, had said the bond's positive real yield and demand from pension funds associated with the end of the month and the quarter would support the sale.
Ladha said pricing of the bond, yielding 3.5 basis points over the 4 percent 2060 gilt, was "on the cheap side of fair value", but added that it was understandable given the overall pressure on government bonds.
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